Edgar Filing: BLUCORA, INC.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2017



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

For the transition period from to

Commission File Number: 000-25131

BLUCORA, INC.

(Exact name of registrant as specified in its charter)



Delaware	91-1718107
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
6333 State Hwy 161, 6th Floor, Irving, Texas	75038
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (972) 870-6000

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

Indicate by check mark whether the registrant has submitted electronically 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). ý Yes o No

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



Large accelerated filer	o	Accelerated filer	ý
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. o

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

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



	Outstanding at
Class	October 19, 2017
Common Stock, Par Value $0.0001	46,125,990

Table of Contents

TABLE OF CONTENTS



PART I—FINANCIAL INFORMATION		Page
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income	4
	Unaudited Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39

Signatures		40

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



	September 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	78,558		$	51,713
Cash segregated under federal or other regulations	313			2,355
Available-for-sale investments	—			7,101
Accounts receivable, net of allowance	6,952			10,209
Commissions receivable	16,432			16,144
Other receivables	592			4,004
Prepaid expenses and other current assets, net	4,777			6,321
Total current assets	107,624			97,847
Long-term assets:
Property and equipment, net	9,552			10,836
Goodwill, net	549,064			548,741
Other intangible assets, net	336,872			362,178
Other long-term assets	2,557			3,057
Total long-term assets	898,045			924,812
Total assets	$	1,005,669		$	1,022,659
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,161		$	4,536
Commissions and advisory fees payable	16,564			16,587
Accrued expenses and other current liabilities	18,768			18,528
Deferred revenue	7,118			12,156
Current portion of long-term debt, net	2,560			2,560
Total current liabilities	48,171			54,367
Long-term liabilities:
Long-term debt, net	344,232			248,221
Convertible senior notes, net	—			164,176
Deferred tax liability, net	59,118			111,126
Deferred revenue	1,031			1,849
Other long-term liabilities	8,530			10,205
Total long-term liabilities	412,911			535,577
Total liabilities	461,082			589,944

Redeemable noncontrolling interests	16,162			15,696

Commitments and contingencies (Note 9)

Stockholders’ equity:
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares,
46,077 and 41,845	5			4
Additional paid-in capital	1,552,609			1,510,152
Accumulated deficit	(1,024,222		)	(1,092,756		)
Accumulated other comprehensive income (loss)	33			(381		)
Total stockholders’ equity	528,425			417,019
Total liabilities and stockholders’ equity	$	1,005,669		$	1,022,659

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Revenue:
Wealth management services revenue	$	86,809		$	80,088		$	254,772		$	233,496
Tax preparation services revenue	3,362			3,149			156,936			135,614
Total revenue	90,171			83,237			411,708			369,110
Operating expenses:
Cost of revenue:
Wealth management services cost of revenue	59,607			54,921			172,444			158,213
Tax preparation services cost of revenue	1,314			1,319			7,543			6,549
Amortization of acquired technology	50			49			145			765
Total cost of revenue	60,971			56,289			180,132			165,527
Engineering and technology	5,051			4,588			14,041			12,842
Sales and marketing	13,680			11,965			84,974			75,715
General and administrative	12,207			11,638			39,405			35,899
Depreciation	867			968			2,680			2,906
Amortization of other acquired intangible assets	8,615			8,297			25,192			24,929
Restructuring	106			—			2,726			—
Total operating expenses	101,497			93,745			349,150			317,818
Operating income (loss)	(11,326		)	(10,508		)	62,558			51,292
Other loss, net	(5,241		)	(11,453		)	(39,149		)	(29,883		)
Income (loss) from continuing operations before income taxes	(16,567		)	(21,961		)	23,409			21,409
Income tax benefit (expense)	(166		)	8,537			(5,952		)	(8,899		)
Income (loss) from continuing operations	(16,733		)	(13,424		)	17,457			12,510
Discontinued operations, net of income taxes	—			(40,528		)	—			(57,981		)
Net income (loss)	(16,733		)	(53,952		)	17,457			(45,471		)
Net income attributable to noncontrolling interests	(164		)	(167		)	(466		)	(426		)
Net income (loss) attributable to Blucora, Inc.	$	(16,897	)	$	(54,119	)	$	16,991		$	(45,897	)
Net income (loss) per share attributable to Blucora, Inc. - basic:
Continuing operations	$	(0.37	)	$	(0.33	)	$	0.39		$	0.29
Discontinued operations	—			(0.97		)	—			(1.40		)
Basic net income (loss) per share	$	(0.37	)	$	(1.30	)	$	0.39		$	(1.11	)
Net income (loss) per share attributable to Blucora, Inc. - diluted:
Continuing operations	$	(0.37	)	$	(0.33	)	$	0.36		$	0.29
Discontinued operations	—			(0.97		)	—			(1.37		)
Diluted net income (loss) per share	$	(0.37	)	$	(1.30	)	$	0.36		$	(1.08	)
Weighted average shares outstanding:
Basic	45,459			41,635			43,749			41,404
Diluted	45,459			41,635			46,813			42,329
Other comprehensive income (loss):
Net income (loss)	$	(16,733	)	$	(53,952	)	$	17,457		$	(45,471	)
Unrealized gain on available-for-sale investments, net of tax	—			—			1			10
Foreign currency translation adjustment	223			(77		)	413			246
Other comprehensive income (loss)	223			(77		)	414			256
Comprehensive income (loss)	(16,510		)	(54,029		)	17,871			(45,215		)
Comprehensive income attributable to noncontrolling interests	(164		)	(167		)	(466		)	(426		)
Comprehensive income (loss) attributable to Blucora, Inc.	$	(16,674	)	$	(54,196	)	$	17,405		$	(45,641	)

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



	Nine months ended September 30,
	2017			2016
Operating Activities:
Net income (loss)	$	17,457		$	(45,471	)
Less: Discontinued operations, net of income taxes	—			(57,981		)
Net income from continuing operations	17,457			12,510
Adjustments to reconcile net income from continuing operations to net cash from operating activities:
Stock-based compensation	8,434			10,616
Depreciation and amortization of acquired intangible assets	28,553			29,080
Restructuring (non-cash)	1,499			—
Deferred income taxes	(473		)	(12,484		)
Amortization of premium on investments, net	10			164
Amortization of debt issuance costs	891			1,440
Accretion of debt discounts	1,893			3,599
(Gain) loss on debt extinguishment	19,764			(641		)
Revaluation of acquisition-related contingent consideration liability	—			391
Other	—			18
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable	3,259			793
Commissions receivable	(288		)	1,034
Other receivables	2,384			19,656
Prepaid expenses and other current assets	1,720			6,003
Other long-term assets	432			(1,174		)
Accounts payable	(1,375		)	1,151
Commissions and advisory fees payable	(23		)	(1,600		)
Deferred revenue	(5,856		)	(1,805		)
Accrued expenses and other current and long-term liabilities	949			19,786
Net cash provided by operating activities from continuing operations	79,230			88,537
Investing Activities:
Business acquisition, net of cash acquired	—			(1,788		)
Purchases of property and equipment	(3,809		)	(2,648		)
Proceeds from sales of investments	249			—
Proceeds from maturities of investments	7,252			11,808
Purchases of investments	(409		)	(5,147		)
Net cash provided by investing activities from continuing operations	3,283			2,225
Financing Activities:
Proceeds from credit facilities	367,212			—
Payments on convertible notes	(172,827		)	(20,667		)
Payments on credit facilities	(285,000		)	(105,000		)
Proceeds from stock option exercises	38,228			1,141
Proceeds from issuance of stock through employee stock purchase plan	1,428			1,402
Tax payments from shares withheld for equity awards	(6,744		)	(1,447		)
Contingent consideration payments for business acquisition	(946		)	—
Net cash used by financing activities from continuing operations	(58,649		)	(124,571		)
Net cash provided (used) by continuing operations	23,864			(33,809		)

Net cash provided by operating activities from discontinued operations	—			12,359
Net cash provided by investing activities from discontinued operations	1,028			43,230
Net cash used by financing activities from discontinued operations	—			(9,000		)
Net cash provided by discontinued operations	1,028			46,589

Effect of exchange rate changes on cash, cash equivalents, and restricted cash	86			(15		)
Net increase in cash, cash equivalents, and restricted cash	24,978			12,765
Cash, cash equivalents, and restricted cash, beginning of period	54,868			59,830
Cash, cash equivalents, and restricted cash, end of period	$	79,846		$	72,595

Cash paid for income taxes from continuing operations	$	1,013		$	2,079
Cash paid for interest from continuing operations	$	14,205		$	23,455

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: The Company and Basis of Presentation

Description of the business: Blucora, Inc. (the "Company" or "Blucora") operates two businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries ("HD Vest"). HDV Holdings, Inc. is the parent company of the Wealth Management business and owns all outstanding shares of HD Vest, Inc., which serves as a holding company for the various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (an introducing broker-dealer), HD Vest Advisory Services, Inc. (a registered investment advisor), and HD Vest Insurance Agency, LLC (an insurance broker) (collectively referred to as the "Wealth Management business" or the "Wealth Management segment"). The Tax Preparation business consists of the operations of TaxAct, Inc. ("TaxAct") and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectively referred to as the "Tax Preparation business" or the "Tax Preparation segment").

Prior to 2017, the Company also operated an internet Search and Content business and an E-Commerce business through 2016. The Search and Content business operated through the InfoSpace LLC subsidiary ("InfoSpace"), and the E-Commerce business consisted of the operations of Monoprice, Inc. ("Monoprice").

On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market (the "Strategic Transformation"). Strategic Transformation refers to the Company's transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest (see "Note 3: Business Combinations") and the divestitures of the Search and Content and E-Commerce businesses in 2016 (see "Note 4: Discontinued Operations"). As part of the Strategic Transformation and "One Company" operating model, the Company announced on October 27, 2016 plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The actions to relocate corporate headquarters were intended to drive efficiencies and improve operational effectiveness (see "Note 5: Restructuring"). The restructuring is now substantially complete and it is expected to be completed by early 2018.

Segments: The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment.

Reclassification: The Company reclassified certain amounts on its consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 2: Summary of Significant Accounting Policies" for additional information.

Note 2: Summary of Significant Accounting Policies

Interim financial information: The accompanying consolidated financial statements have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. These consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Interim results are not necessarily indicative of results for a full year.

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

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	September 30,				December 31,
	2017		2016		2016		2015
Cash and cash equivalents	$	78,558	$	71,165	$	51,713	$	55,473
Cash segregated under federal or other regulations	313		630		2,355		3,557
Restricted cash included in "Prepaid expenses and other current assets, net"	425		100		250		100
Restricted cash included in "Other long-term assets"	550		700		550		700
Total cash, cash equivalents, and restricted cash	$	79,846	$	72,595	$	54,868	$	59,830

Cash segregated under federal and other regulations is held in a segregated bank account for the exclusive benefit of the Company’s Wealth Management business customers. Restricted cash included in prepaid expenses and other current assets, net and other long-term assets represents amounts pledged as collateral for certain of the Company's banking arrangements.

Fair value of financial instruments: The Company measures its cash equivalents, available-for-sale investments, and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.

Cash equivalents and debt securities are classified within Level 2 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values them utilizing market observable inputs. Unrealized gains and losses are included in "Accumulated other comprehensive income (loss)" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.

The Company has a contingent consideration liability that is related to the Company's 2015 acquisition of SimpleTax Software Inc. ("SimpleTax") and is classified within Level 3 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values it utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment, and the discount rate. The change in the fair value of the contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which the fair value changes.

Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured.

For cash equivalents, short-term investments, and commissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.

Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of geographic areas. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.

Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is evaluating, or has adopted, ASUs that impact the following areas:

Revenue recognition - In May 2014, the FASB issued guidance codified in ASC 606, "Revenue from Contracts with Customers," which amends the guidance in former ASC 605 "Revenue Recognition." The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis--either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning

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after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

The Company will adopt the requirements of the new standard on January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Company will recognize the cumulative effect of adopting this ASU as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Company expects that the adoption of this ASU will not have a material impact to its consolidated financial statements, including the presentation of revenues in the statement of comprehensive income.

Leases (ASU 2016-02) - In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) and have a term of twelve months or less, will be recognized on the balance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a modified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is permitted. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

Stock-based compensation (ASU 2016-09) - In March 2016, the FASB issued an ASU on employee share-based payment accounting. The ASU requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense, rather than as additional paid-in capital. In addition, the ASU requires that excess tax benefits be recorded in the period that shares vest or settle, regardless of whether the benefit reduces taxes payable in the same period. Cash flows related to excess tax benefits will be included as an operating activity, and no longer classified as a financing activity, in the statement of cash flows. This guidance was effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016. The guidance related to the recognition of excess tax benefits and deficiencies as income tax benefit or expense was effective on a prospective basis, and the guidance related to the timing of excess tax benefit recognition was effective using a modified retrospective transition method with a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The cash flow presentation guidance was effective on a retrospective or prospective basis.

The Company implemented this ASU on January 1, 2017 and recorded a cumulative-effect adjustment of $51.5 million to credit retained earnings for deferred tax assets related to net operating losses that arose from excess tax benefits, which the Company has deemed realizable. In addition to this:

•

At the time of adoption and on a prospective basis, the primary impact of adoption was the recognition of excess tax benefits and deficiencies, including deferred tax assets related to net operating losses that arose from excess tax benefits which the Company has deemed realizable, in the income tax provision (rather than in additional paid-in capital). This caused income taxes to differ from taxes at the statutory rates in 2017. For the three months ended September 30, 2017, the Company recognized an estimated $7.0 million increase to the income tax provision, which resulted in a $7.0 million decrease to income from continuing operations and net income attributable to Blucora, a $0.15 decrease to basic earnings per share, and a $0.15 decrease to diluted earnings per share. For the nine months ended September 30, 2017, the Company recognized an estimated $0.4 million increase to the income tax provision, which resulted in a $0.4 million decrease to income from continuing operations and net income attributable to Blucora, a $0.01 decrease to basic earnings per share, and a $0.01 decrease to diluted earnings per share.

•

The Company applied the cash flow presentation guidance on a retrospective basis, restating the consolidated statements of cash flows to present excess tax benefits as an operating activity (rather than a financing activity). For the three months ended September 30, 2016, this resulted in a decrease to cash provided by operating activities from continuing operations of $5.6 million and a corresponding decrease to cash used by financing activities from continuing operations for the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. For the nine months ended September 30, 2016, this resulted in an increase to cash provided by operating activities from continuing operations of $21.4 million and a corresponding increase to cash used by financing activities from continuing operations for the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. The restatement had no impact on total cash flows for the period presented.

The ASU also clarifies that payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity in the statement of cash flows, allows the repurchase of more of an employee's shares for tax withholding purposes without triggering liability accounting, and provides an accounting policy election to account for forfeitures as they occur. The cash flow presentation requirements for payments made to tax authorities on an employee's

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behalf had no impact to any periods presented, since such cash flows historically have been presented as a financing activity. The Company is not planning to change tax withholdings and will continue to estimate forfeitures in determining the amount of compensation cost to be recognized in each period.

Statement of cash flows and restricted cash (ASU 2016-18) - In November 2016, the FASB issued an ASU on the classification and presentation of changes in restricted cash on the statement of cash flows. The ASU requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and restricted cash; therefore, the amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows. This guidance is effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. The guidance is effective on a retrospective basis. The Company elected to early adopt this guidance as of January 1, 2017. The reclassification was not material to the periods presented and had no impact on total cash flows, income from continuing operations, or net income attributable to Blucora for the periods presented. See the "Cash, cash equivalents, and restricted cash" section of this note for additional information.

Note 3: Business Combinations

HD Vest: On December 31, 2015 and pursuant to the Purchase Agreement dated October 14, 2015, the Company acquired HD Vest for $613.7 million, after a $1.8 million final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and their clients. In connection with the acquisition, certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. A portion of those shares were sold to the Company in exchange for a promissory note. After giving effect to the rollover shares and related purchase of the rollover shares for the promissory note, the Company indirectly owns 95.52% of HDV Holdings, Inc., with the remaining 4.48% noncontrolling interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.

The Purchase Agreement dictated that the Company placed into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance. The contingent consideration threshold was not achieved; therefore, the amount was excluded from the purchase price and recorded as a receivable in "Other receivables" as of December 31, 2015 for the amount that was returned to the Company from the escrow agent in the first quarter of 2016.

Note 4: Discontinued Operations

On November 17, 2016, the Company closed on an agreement with YFC-Boneagle Electric Co., Ltd. ("YFC"), under which YFC acquired the E-Commerce business for $40.5 million, which included a working capital adjustment. Of this amount, $39.5 million was received in the fourth quarter of 2016 and $1.0 million was received in the second quarter of 2017--both amounts were included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt.

On August 9, 2016, the Company closed on an agreement with OpenMail LLC ("OpenMail"), under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment, and was included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt.

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Summarized financial information for discontinued operations is as follows (in thousands):



	Three months ended September 30,					Nine months ended September 30,
	2017		2016			2017		2016
Major classes of items in net income (loss):
Revenues	$	—	$	53,721		$	—	$	209,108
Operating expenses	—		(50,952		)	—		(192,874		)
Other loss, net	—		(415		)	—		(844		)
Income from discontinued operations before income taxes	—		2,354			—		15,390
Loss on sale of discontinued operations before income taxes	—		(29,509		)	—		(68,034		)
Discontinued operations, before income taxes	—		(27,155		)	—		(52,644		)
Income tax expense	—		(13,373		)	—		(5,337		)
Discontinued operations, net of income taxes	$	—	$	(40,528	)	$	—	$	(57,981	)

Note 5: Restructuring

The following table summarizes the activity in the restructuring liability (in thousands), resulting from the relocation of corporate headquarters to Irving, Texas as part of the Strategic Transformation:



	Employee-Related Termination Costs			Contract Termination Costs			Fixed Asset Impairments			Stock-Based Compensation			Other Costs			Total
Balance as of December 31, 2016	$	4,234		$	—		$	—		$	—		$	—		$	4,234
Restructuring charges	(30		)	(241		)	1,878			981			32			2,620
Payments	(434		)	(161		)	—			—			(32		)	(627		)
Non-cash	—			1,457			(1,878		)	(981		)	—			(1,402		)
Balance as of June 30, 2017	3,770			1,055			—			—			—			4,825
Restructuring charges	(3		)							97			12			106
Payments	(2,447		)	(256		)	—			—			(12		)	(2,715		)
Non-cash	—			—			—			(97		)	—			(97		)
Balance as of September 30, 2017	$	1,320		$	799		$	—		$	—		$	—		$	2,119

Employee-related termination costs primarily include severance benefits, under both ongoing and one-time benefit arrangements that are payable at termination dates throughout 2017, with the majority paid in the second half of 2017. Contract termination costs and fixed asset impairments were incurred in connection with the Bellevue facility's operating lease and related fixed assets, which are described further in the next two paragraphs, respectively. Stock-based compensation primarily includes the impact of equity award modifications associated with employment contracts for certain individuals impacted by the relocation, as well as forfeitures that were recorded for severed employees. Other costs include office moving costs.

The Company has a non-cancelable operating lease that runs through 2020 for its former corporate headquarters in Bellevue, Washington, which the Company occupied until May 2017. In March 2017, the Company agreed to a sublease for the entire Bellevue facility, which was effective June 1, 2017 and expires on September 30, 2020, consistent with the underlying operating lease. Under that sublease agreement, the Company will not recover all of its remaining lease rental obligations (including common area maintenance costs and real estate taxes) and, therefore, recognized a loss on sublease of $1.1 million. See "Note 9: Commitments and Contingencies" for additional information on the sublease. The Company also wrote-off its $1.5 million deferred rent liability (a non-cash item), related to various lease incentives that had been provided originally by the landlord, and incurred broker commissions related to the sublease agreement. All of these items were recorded as contract termination costs in the first quarter of 2017.

The Company began receiving sublease offers in the first quarter of 2017, at which point it was indicated that the remaining lease rental obligations, and the related value for the leasehold improvements and the office furniture and equipment, would not be fully recovered. As a result and given the nature of these fixed assets, the Company fully impaired the $1.9 million carrying value of those assets in the first quarter of 2017.

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Note 6: Fair Value Measurements

In accordance with ASC 820, "Fair Value Measurements and Disclosures", certain of the Company's assets and liabilities, which are carried at fair value, are classified in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.

The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):



			Fair value measurements at the reporting date using
	September 30, 2017		Quoted prices in active markets using identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash equivalents: money market and other funds	$	10,827	$	—	$	10,827	$	—
Total assets at fair value	$	10,827	$	—	$	10,827	$	—
Acquisition-related contingent consideration liability	$	2,704	$	—	$	—	$	2,704
Total liabilities at fair value	$	2,704	$	—	$	—	$	2,704



			Fair value measurements at the reporting date using
	December 31, 2016		Quoted prices in active markets using identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash equivalents:
U.S government securities	$	2,749	$	—	$	2,749	$	—
Money market and other funds	4,090		—		4,090		—
Commercial paper	1,999		—		1,999		—
Taxable municipal bonds	1,301		—		1,301		—
Total cash equivalents	10,139		—		10,139		—
Available-for-sale investments:
Debt securities:
U.S. government securities	2,000		—		2,000		—
Commercial paper	1,998		—		1,998		—
Time deposits	807		—		807		—
Taxable municipal bonds	2,296		—		2,296		—
Total debt securities	7,101		—		7,101		—
Total assets at fair value	$	17,240	$	—	$	17,240	$	—

Acquisition-related contingent consideration liability	$	3,421	$	—	$	—	$	3,421
Total liabilities at fair value	$	3,421	$	—	$	—	$	3,421

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A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):



Acquisition-related contingent consideration liability:
Balance as of December 31, 2016	$	3,421
Payment	(946		)
Foreign currency transaction loss	229
Balance as of September 30, 2017	$	2,704

The contingent consideration liability is related to the Company's 2015 acquisition of SimpleTax. The full contractual obligation under the contingent consideration arrangement was accrued during the year ended December 31, 2016. Payments are contingent upon product availability and revenue performance over a three-year period ending December 31, 2018 and are expected to occur annually over that period. The first payment was made in the first quarter of 2017 and classified as a financing activity on the consolidated statements of cash flows. The remaining payments are expected through 2019. The foreign currency transaction loss was included in "Other loss, net" on the consolidated statements of comprehensive income. As of September 30, 2017, $1.3 million of the contingent consideration liability was included in "Accrued expenses and other current liabilities" and $1.4 million in "Other long-term liabilities" on the consolidated balance sheets.

The contractual maturities of the debt securities classified as available-for-sale at December 31, 2016 were less than one year.

The cost and fair value of available-for-sale investments were as follows (in thousands):



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Balance as of December 31, 2016	$	7,102	$	—	$	(1	)	$	7,101

The Company had non-recurring Level 3 fair value measurements in 2017 and 2016 related to the redemption and repurchase of its Convertible Senior Notes. See "Note 7: Debt" for details.

Note 7: Debt

The Company’s debt consisted of the following (in thousands):



	September 30, 2017										December 31, 2016
	Principal amount		Discount			Debt issuance costs			Net carrying value		Principal amount		Discount			Debt issuance costs			Net carrying value
Senior secured credit facility	$	350,000	$	(1,681	)	$	(4,727	)	$	343,592	$	—	$	—		$	—		$	—
TaxAct - HD Vest 2015 credit facility	—		—			—			—		260,000		(7,124		)	(5,295		)	247,581
Convertible Senior Notes	—		—			—			—		172,859		(6,913		)	(1,770		)	164,176
Note payable, related party	3,200		—			—			3,200		3,200		—			—			3,200
Total debt	$	353,200	$	(1,681	)	$	(4,727	)	$	346,792	$	436,059	$	(14,037	)	$	(7,065	)	$	414,957

Senior secured credit facility: On May 22, 2017, Blucora entered into an agreement with a syndicate of lenders for the purposes of refinancing the credit facility previously entered into in 2015 for the purposes of financing the HD Vest acquisition (the "TaxAct - HD Vest 2015 credit facility"), redeeming its Convertible Senior Notes that were outstanding at the time (the "Notes"), and providing future working capital and capital expenditure flexibility. Consequently, the TaxAct - HD Vest 2015 credit facility was repaid in full and the commitments under the TaxAct - HD Vest revolving credit facility were terminated. The Blucora senior secured credit facility consists of a committed $50.0 million revolving credit loan, which includes a letter of credit sub-facility, and a $375.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan are May 22, 2022 and May 22, 2024, respectively. Obligations under the credit facility are guaranteed by certain of Blucora's subsidiaries and secured by the assets of Blucora and those subsidiaries.

Blucora borrowed $375.0 million under the term loan when it entered into the senior secured credit facility. Principal payments on the term loan are payable quarterly in an amount equal to 0.25% of the initial outstanding principal. The interest rate on the term loan is variable at the London Interbank Offered Rate ("LIBOR"), subject to a floor of 1.00%, plus a margin

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of 3.75%, payable at the end of each interest period. Through September 30, 2017, Blucora has made prepayments of $25.0 million towards the term loan.

Blucora may borrow under the revolving credit loan in an aggregate principal amount not less than $2.0 million or any whole multiple of $1.0 million in excess thereof. Principal payments on the revolving credit loan are payable at maturity. The interest rate on the revolving credit loan is variable, with initial draws at LIBOR plus a margin of 3.00%. Subsequent draws on the revolving credit loan also have variable interest rates, based upon LIBOR plus a margin of between 2.75% and 3.00%. In each case, the applicable margin within the range depends upon Blucora's Consolidated First Lien Net Leverage Ratio (as defined in the credit agreement for the credit facility) over the previous four quarters. Interest is payable at the end of each interest period. Blucora has not borrowed any amounts under the revolving credit loan.

Blucora has the right to permanently reduce and/or prepay, without premium or penalty (other than customary LIBOR breakage costs), the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $5.0 million ($2.0 million in the case of prepayments) or any whole multiple of $1.0 million in excess thereof, except for prepayments through November 22, 2017, which require a prepayment of a premium equal to 1.00% of the total principal amount prepaid. Beginning on December 31, 2018, Blucora will be required to make annual prepayments if certain levels of cash flow are achieved.

The credit facility includes financial and operating covenants, including a consolidated total net leverage ratio, which are set forth in detail in the credit agreement. As of September 30, 2017, Blucora was in compliance with all of the financial and operating covenants.

As of September 30, 2017, the credit facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.

In connection with the refinancing, the Company performed an analysis by creditor and determined that the refinancing qualified as an extinguishment. As a result, the Company recognized a loss on debt extinguishment during the three months ended June 30, 2017, which was recorded in "Other loss, net" on the consolidated statements of comprehensive income and consisted of the following (in thousands):



Loss on debt extinguishment - TaxAct - HD Vest 2015 credit facility	$	9,593
Loss on debt extinguishment - Convertible Senior Notes	6,715
Total loss on debt extinguishment	$	16,308

The amount for the TaxAct - HD Vest 2015 credit facility included the write-off of the remaining unamortized discount and debt issuance costs. For the Notes, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the redeemed Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a loss and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.

TaxAct - HD Vest 2015 credit facility: The Company had repayment activity of $64.0 million and $105.0 million during the nine months ended September 30, 2017 and 2016, respectively. These repayments resulted in the acceleration of a portion of the unamortized discount and debt issuance costs, which were recorded in "Other loss, net" on the consolidated statements of comprehensive income.

Convertible Senior Notes: In June 2017, the Company redeemed almost all of the outstanding Notes for cash with proceeds from the senior secured credit facility.

During the nine months ended September 30, 2016, the Company repurchased $28.4 million of the Notes for cash of $20.7 million. Similar to the analysis performed for the Notes that were redeemed in June 2017, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the repurchased Notes. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a gain, since the Notes were repurchased below par value, and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.

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The following table sets forth total interest expense, prior to the refinancing, related to the Notes (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Contractual interest expense (Cash)	$	—	$	1,836	$	3,141	$	5,782
Amortization of debt issuance costs (Non-cash)	—		231		401		704
Accretion of debt discount (Non-cash)	—		901		1,567		2,749
Total interest expense	$	—	$	2,968	$	5,109	$	9,235

Note payable, related party: The note payable is with the former President of HD Vest and arose in connection with the acquisition of HD Vest. Certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the acquisition's closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. The former President of HD Vest sold a portion of his shares to the Company in exchange for the note. The note will be paid over a three-year period, with 50% paid in year one ($3.2 million was paid in December 2016), 40% paid in year two, and 10% paid in year three. The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value.

Note 8: Redeemable Noncontrolling Interests

A reconciliation of redeemable noncontrolling interests is as follows (in thousands):



Balance as of December 31, 2016	$	15,696
Net income attributable to noncontrolling interests	466
Balance as of September 30, 2017	$	16,162

The redemption amount at September 30, 2017 was $12.4 million.

Note 9: Commitments and Contingencies

Significant events during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of the Company’s business, include debt activity (as discussed further in "Note 7: Debt"), payment of a portion of the acquisition-related contingent consideration liability (as discussed further in "Note 6: Fair Value Measurements"), estimated sublease income of $3.8 million primarily related to the sublease agreement for the Bellevue facility (as discussed further in "Note 5: Restructuring"), purchase commitments with a vendor to provide cloud computation services of $11.3 million over the next four years, and a commitment to switch to a new clearing firm provider that has been selected by the Company by the third quarter of 2018. Additional information on the Company’s Commitments and Contingencies can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Litigation: From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The following is a brief description of the more significant legal proceedings. Although the Company believes that resolving such claims, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.

On December 12, 2016, a shareholder derivative action was filed by Jeffrey Tilden against the Company, as a nominal defendant, Andrew Snyder, who was a director of the Company at that time, certain companies affiliated with Mr. Snyder, a former officer of the Company, GCA Savvian Advisors, LLC ("GCA Savvian"), and certain other current and former members of the Blucora Board of Directors, in the Superior Court of the State of California in and for the County of San Francisco. The complaint asserts claims for breaches of fiduciary duty against certain current and former directors of the Company related to the Company’s share repurchases and the Company’s acquisitions of HD Vest and Monoprice. The complaint asserts a claim against GCA Savvian, the Company’s financial advisor in connection with the HD Vest acquisition, for aiding and abetting breaches of fiduciary duty. The complaint also asserts a claim for insider trading against Mr. Snyder, a former officer of the Company, and certain companies affiliated with Mr. Snyder. The derivative action does not seek monetary damages from the Company. The complaint seeks corporate governance reforms, declaratory relief, monetary damages from the other defendants, attorney’s fees and prejudgment interest.

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On March 10, 2017, the Company filed a motion to dismiss for improper venue as a result of a forum selection provision in the Company’s bylaws that required the plaintiff to file his derivative fiduciary duty claims in Delaware. Other defendants also filed motions to quash the summons due to a lack of personal jurisdiction over them. On July 25, 2017, the Court granted the Company's motion to dismiss. The case has been stayed by the Court until November 22, 2017, after which the case will be dismissed without further order of the Court.

The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors, and the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions. Pursuant to these agreements, the Company may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.

Note 10: Stockholders’ Equity

Stock-based compensation: The Company included the following amounts for stock-based compensation expense, which related to stock options, restricted stock units ("RSUs"), and the Company’s employee stock purchase plan ("ESPP"), in the consolidated statements of comprehensive income (in thousands):



	Three months ended September 30,					Nine months ended September 30,
	2017		2016			2017		2016
Cost of revenue	$	412	$	52		$	546	$	117
Engineering and technology	225		434			734		1,167
Sales and marketing	529		661			1,801		1,688
General and administrative	1,966		2,217			5,353		7,644
Restructuring	97		—			1,078		—
Total in continuing operations	3,229		3,364			9,512		10,616
Discontinued operations	—		(727		)	—		2,014
Total	$	3,229	$	2,637		$	9,512	$	12,630

In the second quarter of 2017, the Company granted 350,000 non-qualified stock options to certain HD Vest financial advisors, who are considered non-employees. These stock options vest fully three years from the date of grant. The Company used the Black-Scholes-Merton valuation method to calculate stock-based compensation, using assumptions for the risk-free interest rate, expected dividend yield, expected volatility, and expected life under the same methodology that is used for employee grants. Since these are non-employee grants, stock-based compensation expense will be remeasured at the end of each quarter. For the three and nine months ended September 30, 2017, stock-based compensation expense for these non-employees was $0.4 million and $0.5 million, respectively, and was recorded in "Cost of revenue" on the consolidated statements of comprehensive income.

Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):



	Three months ended September 30,		Nine months ended September 30,
	2017	2016	2017	2016
Stock options exercised	1,243	—	3,651	140
RSUs vested	91	102	442	426
Shares purchased pursuant to ESPP	62	114	138	191
Total	1,396	216	4,231	757

Note 11: Segment Information

The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. The former Search and Content and E-Commerce segments are included in discontinued operations. The Company’s Chief Executive Officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.

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



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Revenue:
Wealth Management	$	86,809		$	80,088		$	254,772		$	233,496
Tax Preparation	3,362			3,149			156,936			135,614
Total revenue	90,171			83,237			411,708			369,110
Operating income (loss):
Wealth Management	12,425			11,628			36,684			32,458
Tax Preparation	(6,238		)	(4,382		)	83,410			72,987
Corporate-level activity	(17,513		)	(17,754		)	(57,536		)	(54,153		)
Total operating income (loss)	(11,326		)	(10,508		)	62,558			51,292
Other loss, net	(5,241		)	(11,453		)	(39,149		)	(29,883		)
Income tax benefit (expense)	(166		)	8,537			(5,952		)	(8,899		)
Discontinued operations, net of income taxes	—			(40,528		)	—			(57,981		)
Net income (loss)	$	(16,733	)	$	(53,952	)	$	17,457		$	(45,471	)

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



	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Wealth Management:
Commission	$	39,432	$	38,962	$	117,181	$	111,070
Advisory	37,588		32,705		107,078		95,759
Asset-based	6,526		5,476		19,276		16,689
Transaction and fee	3,263		2,945		11,237		9,978
Total Wealth Management revenue	$	86,809	$	80,088	$	254,772	$	233,496
Tax Preparation:
Consumer	$	3,149	$	2,950	$	143,239	$	122,678
Professional	213		199		13,697		12,936
Total Tax Preparation revenue	$	3,362	$	3,149	$	156,936	$	135,614

Note 12: Net Income (Loss) Per Share

"Basic net income (loss) per share" is computed using the weighted average number of common shares outstanding during the period. "Diluted net income (loss) per share" is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and vesting of unvested RSUs. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.

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The computation of basic and diluted net income (loss) per share attributable to Blucora, Inc. is as follows (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Numerator:
Income (loss) from continuing operations	$	(16,733	)	$	(13,424	)	$	17,457		$	12,510
Net income attributable to noncontrolling interests	(164		)	(167		)	(466		)	(426		)
Income (loss) from continuing operations attributable to Blucora, Inc.	(16,897		)	(13,591		)	16,991			12,084
Loss from discontinued operations attributable to Blucora, Inc.	—			(40,528		)	—			(57,981		)
Net income (loss) attributable to Blucora, Inc.	$	(16,897	)	$	(54,119	)	$	16,991		$	(45,897	)
Denominator:
Weighted average common shares outstanding, basic	45,459			41,635			43,749			41,404
Dilutive potential common shares	—			—			3,064			925
Weighted average common shares outstanding, diluted	45,459			41,635			46,813			42,329
Net income (loss) per share attributable to Blucora, Inc. - basic:
Continuing operations	$	(0.37	)	$	(0.33	)	$	0.39		$	0.29
Discontinued operations	—			(0.97		)	—			(1.40		)
Basic net income (loss) per share	$	(0.37	)	$	(1.30	)	$	0.39		$	(1.11	)
Net income (loss) per share attributable to Blucora, Inc. - diluted:
Continuing operations	$	(0.37	)	$	(0.33	)	$	0.36		$	0.29
Discontinued operations	—			(0.97		)	—			(1.37		)
Diluted net income (loss) per share	$	(0.37	)	$	(1.30	)	$	0.36		$	(1.08	)
Shares excluded	5,798			10,246			1,160			6,317

Shares excluded primarily related to the anti-dilutive effect of a net loss (for the three months ended September 30, 2017 and 2016), and stock options with an exercise price greater than the average price during the applicable periods.

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

This Quarterly Report on Form 10-Q 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 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the words "anticipate," "believe," "plan," "project," "expect," "future," "intend," "may," "will," "should," "could," "would,""estimate," "predict," "potential," "continue," and similar expressions. 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 "Strategic Transformation;" 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 Part II Item 1A, "Risk Factors," and elsewhere in this report. You should not rely on forward-looking statements included herein, which speak only as of the date of this Quarterly Report on Form 10-Q or the date specified herein. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included under Part 1 Item 1 of this report, as well as with our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.

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Our Business

Blucora (the "Company," "Blucora," or "we") operates two businesses: a Wealth Management business and an online Tax Preparation business.

The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (collectively referred to as "HD Vest" or the "Wealth Management Business"). HD Vest provides wealth management solutions for financial advisors and their clients. Specifically, HD Vest provides an integrated platform of brokerage, investment advisory and insurance services to assist in making each financial advisor a financial service center for his/her clients. HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. HD Vest primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management and other fees.

The Tax Preparation business consists of the operations of TaxAct, Inc. (collectively referred to as "TaxAct" or the "Tax Preparation business"). TaxAct provides digital do-it-yourself ("DDIY") tax preparation solutions for consumers, small business owners, and tax professionals. TaxAct generates revenue primarily through its online service at www.TaxAct.com. The TaxAct website and the information contained therein or connected thereto is not intended to be incorporated by reference into this Report.

Strategic Transformation

On October 14, 2015, we announced our plans to acquire HD Vest and focus on the technology-enabled financial solutions market (the "Strategic Transformation"). The Strategic Transformation refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest and the divestitures of our Search and Content business that was operated through our former InfoSpace LLC subsidiary ("InfoSpace") and our E-Commerce business that consisted of the operations of Monoprice, Inc. ("Monoprice") in 2016. As part of the Strategic Transformation and our model of operating as "One Company", we announced on October 27, 2016 plans to relocate our corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The transformation is intended to drive efficiencies and improve operational effectiveness.

In connection with the relocation of our corporate headquarters, we have incurred restructuring costs of approximately $6.6 million. These costs are recorded within corporate-level activity for segment purposes. See "Note 5: Restructuring" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information. We also have incurred costs that do not qualify for restructuring classification, such as recruiting and overlap in personnel expenses as we transition positions to Texas ("Strategic Transformation Costs"). The restructuring is now substantially complete and it is expected to be completed by early 2018.

For a discussion of the associated risks, see the sections under the heading "Risks Associated With our Strategic Transformation" in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.

Seasonality

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

Comparability

We reclassified certain amounts on our consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information.

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RESULTS OF OPERATIONS

Summary



(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2017			2016			Percentage Change		2017		2016		Percentage Change
Revenue	$	90,171		$	83,237		8	%	$	411,708	$	369,110	12	%
Operating income (loss)	$	(11,326	)	$	(10,508	)	8	%	$	62,558	$	51,292	22	%

Three months ended September 30, 2017 compared with three months ended September 30, 2016

Revenue increased approximately $6.9 million due to increases of $6.7 million and $0.2 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.

Operating loss increased approximately $0.8 million, consisting of the $6.9 million increase in revenue and offset by an $7.8 million increase in operating expenses. Key changes in operating expenses were:


•	$5.9 million increase in the Wealth Management segment’s operating expenses primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts.


•	$2.1 million increase in the Tax Preparation segment’s operating expenses primarily due to higher maintenance fees, development costs and personnel expenses resulting from overall increased headcount supporting most functions.


•	$0.2 million decrease in corporate-level expense activity primarily due to changes in headcount across most functions.

Nine months ended September 30, 2017 compared with nine months ended September 30, 2016

Revenue increased approximately $42.6 million due to increases of $21.3 million and $21.3 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.

Operating income increased approximately $11.3 million, consisting of the $42.6 million increase in revenue and offset by a $31.3 million increase in operating expenses. Key changes in operating expenses were:


•	$17.1 million increase in the Wealth Management segment’s operating expenses due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.

•

$10.9 million increase in the Tax Preparation segment’s operating expenses primarily due to higher spending on marketing, higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses resulting from overall increased headcount supporting most functions.

•

$3.4 million increase in corporate-level expense activity primarily due to Strategic Transformation Costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costs due to fewer grants in the current year and higher expense recognized in the prior year related to HD Vest grants in 2016, partially offset by activity within our Tax Preparation business due to prior forfeitures.

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 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial

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Statements in Part I Item 1 of this report is presented on a basis consistent with our current internal management financial reporting. We have two reportable segments: Wealth Management and Tax Preparation. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of acquired intangible assets, restructuring, other loss, net, and income taxes to segment operating results. We analyze these separately.

Wealth Management



(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2017			2016			Percentage Change		2017			2016			Percentage Change
Revenue	$	86,809		$	80,088		8	%	$	254,772		$	233,496		9	%
Operating income	$	12,425		$	11,628		7	%	$	36,684		$	32,458		13	%
Segment margin	14		%	15		%			14		%	14		%

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

Sources of revenue



(In thousands, except percentages)			Three months ended September 30,								Nine months ended September 30,
	Sources of Revenue	Primary Drivers	2017			2016			Percentage Change		2017			2016			Percentage Change
Advisor-driven	Commission	- Transactions - Asset levels	$	39,432		$	38,962		1	%	$	117,181		$	111,070		6	%
Advisor-driven	Advisory	- Advisory asset levels	37,588			32,705			15	%	107,078			95,759			12	%
Other revenue	Asset-based	- Cash balances - Interest rates - Number of accounts - Client asset levels	6,526			5,476			19	%	19,276			16,689			16	%
Other revenue	Transaction and fee	- Account activity - Number of clients - Number of advisors - Number of accounts	3,263			2,945			11	%	11,237			9,978			13	%
	Total revenue		$	86,809		$	80,088		8	%	$	254,772		$	233,496		9	%
	Total recurring revenue		$	70,539		$	62,543		13	%	$	203,417		$	183,772		11	%
	Recurring revenue rate		81.3		%	78.1		%			79.8		%	78.7		%

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

Business metrics



(In thousands, except percentages and as otherwise indicated)	September 30,
	2017			2016			Percentage Change
Total Assets Under Administration ("AUA")	$	42,696,862		$	38,482,620		11	%
Advisory Assets Under Management ("AUM")	$	11,984,320		$	10,204,448		17	%
Percentage of total AUA	28.1		%	26.5		%
Number of advisors (in ones)	4,392			4,568			(4	)%
Advisor-driven revenue per advisor	$	17.5		$	15.7		11	%

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Total assets under administration ("AUA") includes assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUA service for a client’s assets, the value of the asset is only counted once in the total amount of AUA. AUA assets include Advisory Assets under Management, non-advisory brokerage accounts, annuities and mutual fund positions held directly with fund companies. These assets are not reported on the consolidated balance sheets.

Advisory assets under management ("AUM") includes external client assets for which we provide investment advisory and management services, typically as a fiduciary under the Investment Advisers Act of 1940. Our compensation for providing such services is typically a fee based on the value of the AUM for each advisory client. These assets are not reported on the consolidated balance sheets.

Three months ended September 30, 2017 compared with three months ended September 30, 2016

Wealth Management revenue increased approximately $6.7 million as discussed by each source of revenue below.

Wealth Management operating income increased approximately $0.8 million, consisting of the $6.7 million increase in revenue and offset by a $5.9 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts.

Nine months ended September 30, 2017 compared with nine months ended September 30, 2016

Wealth Management revenue increased approximately $21.3 million as discussed by each source of revenue below.

Wealth Management operating income increased approximately $4.2 million, consisting of the $21.3 million increase in revenue and offset by an $17.1 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.

Commission revenue: We generate two types of commissions: transaction-based sales commissions and trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors. The level of transaction-based sales commissions can vary from period-to-period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our financial advisors' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets. Our commission revenue, by product category and by sales-based and trailing, was as follows:



(In thousands, except percentages)	Three months ended September 30,						Nine months ended September 30,
	2017		2016		Percentage Change		2017		2016		Percentage Change
By product category:
Mutual funds	$	21,128	$	20,196	5	%	$	62,371	$	59,021	6	%
Variable annuities	12,879		12,395		4	%	36,820		35,725		3	%
Insurance	3,037		3,689		(18	)%	9,715		8,836		10	%
General securities	2,388		2,682		(11	)%	8,275		7,488		11	%
Total commission revenue	$	39,432	$	38,962	1	%	$	117,181	$	111,070	6	%

By sales-based and trailing:
Sales-based	$	15,590	$	16,925	(8	)%	$	49,190	$	47,703	3	%
Trailing	23,842		22,037		8	%	67,991		63,367		7	%
Total commission revenue	$	39,432	$	38,962	1	%	$	117,181	$	111,070	6	%

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Three months ended September 30, 2017 compared with three months ended September 30, 2016

Sales-based commission revenue decreased approximately $1.3 million primarily due to decreased activity in mutual funds, variable annuities, insurance and general securities resulting from overall market performance and portfolio rebalancings. General securities include equities, exchange-traded funds, bonds and alternative investments.

Trailing commission revenue increased approximately $1.8 million and reflects an increase in the market value of the underlying assets and, to a lesser extent, the impact of new investments.

Nine months ended September 30, 2017 compared with nine months ended September 30, 2016

Sales-based commission revenue increased approximately $1.5 million primarily due to increased activity in mutual funds, insurance and general securities resulting from overall market performance, portfolio rebalancings, product availability and segment refocusing, partially offset by decreased activity in variable annuities.

Trailing commission revenue increased approximately $4.6 million and reflects an increase in the market value of the underlying assets and the impact of new investments.

Advisory revenue: Advisory revenue primarily includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Advisor ("RIA") and is based on the value of AUM. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed and, accordingly, the revenues earned in the following three-month period. The majority of our accounts are billed in advance using values as of the last business day of the prior calendar quarter.

The activity within our AUM was as follows:



(In thousands)	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Balance, beginning of the period	$	11,551,288	$	9,814,232	$	10,397,071	$	9,692,244
Net increase (decrease) in new advisory assets	94,408		131,982		613,848		(1,357		)
Market impact and other	338,624		258,234		973,401		513,561
Balance, end of the period	$	11,984,320	$	10,204,448	$	11,984,320	$	10,204,448

Increases or decreases in advisory assets have a limited impact on advisory fee revenue in the period in which they occur. Rather, increases or decreases in advisory assets are a primary driver of future advisory fee revenue. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end AUM.

Three months ended September 30, 2017 compared with three months ended September 30, 2016

The increase in advisory revenue of approximately $4.9 million is primarily due to the increase in the beginning-of-period AUM for the three months ended September 30, 2017 compared with three months ended September 30, 2016, and the conversion of AUA to fee-based AUM.

Nine months ended September 30, 2017 compared with nine months ended September 30, 2016

The increase in advisory revenue of approximately $11.3 million is consistent with the increase in the beginning-of-period AUM for the nine months ended September 30, 2017 compared with nine months ended September 30, 2016, and the conversion of AUA to fee-based AUM.

Asset-based revenue: Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs.

Three months ended September 30, 2017 compared with three months ended September 30, 2016

Asset-based revenue increased $1.1 million, primarily from higher cash sweep revenues following increases in interest rates. In the current interest rate environment, and through our current clearing provider, we will not benefit from any future interest rate increases.

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Nine months ended September 30, 2017 compared with nine months ended September 30, 2016

Asset-based revenue increased $2.6 million, primarily from higher cash sweep revenues following increases in interest rates. In the current interest rate environment, and through our current clearing provider, we will not benefit from any future interest rate increases.

Transaction and fee revenue: Transaction and fee revenue primarily includes fees for executing certain transactions in client accounts and fees related to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions.

Three months ended September 30, 2017 compared with three months ended September 30, 2016

Transaction and fee revenue increased approximately $0.3 million primarily related to advisor fee increases.

Nine months ended September 30, 2017 compared with nine months ended September 30, 2016

Transaction and fee revenue increased approximately $1.3 million primarily related to advisor fee increases.

Tax Preparation



(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2017			2016			Percentage Change		2017			2016			Percentage Change
Revenue	$	3,362		$	3,149		7	%	$	156,936		$	135,614		16	%
Operating income (loss)	$	(6,238	)	$	(4,382	)	42	%	$	83,410		$	72,987		14	%
Segment margin	(186		)%	(139		)%			53		%	54		%

Tax Preparation revenue is derived primarily from sales of our consumer tax preparation software and online services as well as other offerings and ancillary services to consumers and small business owners. 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 and business returns for their clients.

We measure our consumer tax preparation customers using the number of accepted federal tax e-files made through our software and online services. We consider growth in the number of e-files to be an important non-financial metric in measuring the performance of the consumer side of the Tax Preparation business.

We measure our professional tax preparer customers using three metrics--the number of accepted federal tax e-files made through our software, the number of units sold, and the number of e-files per unit sold. We consider growth in these areas to be important non-financial metrics in measuring the performance of the professional tax preparer side of the Tax Preparation business.

Three months ended September 30, 2017 compared with three months ended September 30, 2016

Tax Preparation revenue was comparable to the prior period.

Tax Preparation operating loss increased approximately $1.9 million, consisting of the $0.2 million increase in revenue and offset by a $2.1 million increase in operating expenses. The increase in Tax Preparation segment operating expenses was primarily due to higher maintenance fees, development costs and personnel expenses resulting from overall increased headcount supporting most functions.

Nine months ended September 30, 2017 compared with nine months ended September 30, 2016

Tax Preparation revenue increased approximately $21.3 million primarily due to growth in revenue earned from online consumer users and, to a lesser extent, increased sales of our professional tax preparer software. Online consumer revenue grew, despite a decrease in e-files, due to growth in average revenue per user, primarily resulting from price increases. The decrease in e-files is consistent with our expectations as we are in the early stages of a multi-year pivot toward profitable customers. Revenue derived from professional tax preparers increased primarily due to an increase in the number of professional preparer units sold.

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Tax Preparation operating income increased approximately $10.4 million, consisting of the $21.3 million increase in revenue and offset by a $10.9 million increase in operating expenses. The increase in Tax Preparation segment operating expenses was primarily due to higher spending on marketing, higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses resulting from overall increased headcount supporting most functions.

Corporate-Level Activity



(In thousands)	Three months ended September 30,							Nine months ended September 30,
	2017		2016		Change			2017		2016		Change
Operating expenses	$	4,587	$	4,907	$	(320	)	$	17,823	$	14,066	$	3,757
Stock-based compensation	3,132		3,364		(232		)	8,434		10,616