SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, ~~2022~~2023


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

For the transition period from to


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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

~~BCOR~~AVTA

NASDAQ Global Select Market

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

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

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

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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

As of August 2, ~~2022, 47,746,176~~2023, 36,760,034 shares of the registrant’s Common Stock were outstanding.

This report includes some of the trademarks, trade names, and service marks of ~~Blucora,~~Avantax, Inc. (referred to throughout this report as ~~“Blucora,~~“Avantax,” the “Company,” “we,” “us,” or “our”), including ~~Blucora,~~ Avantax Wealth Management, Avantax Planning Partners, Avantax Retirement Plan Services, HD Vest, 1st Global, ~~HKFS,~~ and ~~TaxAct.~~HKFS. Each one of these trademarks, trade names, or service marks is either (i) our registered trademark, (ii) a trademark for which we have a pending application, (iii) a trade name or service mark for which we claim common law rights, or (iv) a registered trademark or application for registration that we have been authorized by a third party to use.

Solely for convenience, the trademarks, service marks, and trade names included in this report are without the ®, ™™, or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. This report may also include additional trademarks, service marks, and trade names of others, which are the property of their respective owners. All trademarks, service marks, and trade names included in this report are, to our knowledge, the property of their respective owners.

References to our or our subsidiaries’ website addresses or the website addresses of third parties in this report do not constitute incorporation by reference of the information contained on such websites and should not be considered part of this report.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 2~~

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

•our ability to effectively compete within our ~~industries;~~industry;

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

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

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

•the impact of ~~the continuing COVID-19 pandemic on~~ significant interest rate changes;

•our ~~results of operations~~ability to maintain our relationships with third-party partners, providers, suppliers, vendors, distributors, contractors, financial institutions, industry associations, and licensing partners, and our ~~business,~~expectations regarding and reliance on the products, tools, platforms, systems, and services provided by these third parties;

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

•our ability to respond to rapid technological changes, including ~~the impact of the resulting economic~~our ability to successfully release new products and ~~market disruption, the extension of tax filing deadlines~~services or improve upon existing products and ~~other related government actions, and changes in customer behavior related to the foregoing;~~services;

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

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

•~~any downgrade of the Company’s credit ratings;~~

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

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

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

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

•our ability to close, finance, and realize all of the anticipated benefits of acquisitions, as well as our ability to integrate the operations of recently acquired businesses, and the potential impact of such acquisitions on our existing indebtedness and leverage;

•our ability to retain employees and acquired client assets following acquisitions;

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

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

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

•our ability to maintain our relationships with third-party partners, providers, suppliers, vendors, distributors, contractors, financial institutions, industry associations, and licensing partners, and our expectations regarding and reliance on the products, tools, platforms, systems, and services provided by these third parties;

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

•~~risks related to goodwill and acquired intangible asset impairment;~~

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 3~~

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

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

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

•~~the seasonality of our business;~~

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

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

Avantax, Inc. | Q2 2023 Form 10-Q 3

•risks related to goodwill and acquired intangible asset impairment;

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

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

•~~the effects on~~our ability to mitigate and manage risks caused by yield curve, duration and interest rate fluctuations, and other macroeconomic factors upon our business ~~of actions of activist stockholders.~~and financing arrangements through derivative transactions pursuant to our recently implemented hedging policy.

Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021,~~2022, as well as in our other filings with the SEC. All forward-looking statements speak only as of the date of this Form 10-Q. We do not undertake any obligation and do not intend to update or revise any forward-looking statement to reflect new information, events, or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

~~BLUCORA,~~AVANTAX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	171,297	$	134,824	Cash and cash equivalents	$	109,791	$	263,928

Accounts receivable, net	Accounts receivable, net	20,351		21,906		Accounts receivable, net	25,127		24,117
Commissions and advisory fees receivable	Commissions and advisory fees receivable	21,214		25,073		Commissions and advisory fees receivable	22,005		20,679

Prepaid expenses and other current assets	Prepaid expenses and other current assets	17,697		18,476		Prepaid expenses and other current assets	30,054		15,027
Total current assets	Total current assets	230,559		200,279		Total current assets	186,977		323,751
Long-term assets:	Long-term assets:					Long-term assets:
Property, equipment, and software, net	Property, equipment, and software, net	75,741		73,638		Property, equipment, and software, net	51,363		53,041
Right-of-use assets, net	Right-of-use assets, net	19,879		20,466		Right-of-use assets, net	18,556		19,361
Goodwill, net	Goodwill, net	454,821		454,821		Goodwill, net	266,279		266,279
Acquired intangible assets, net	Acquired intangible assets, net	291,540		302,289		Acquired intangible assets, net	259,125		266,002

Other long-term assets	Other long-term assets	26,547		20,450		Other long-term assets	39,340		35,081
Total long-term assets	Total long-term assets	868,528		871,664		Total long-term assets	634,663		639,764
Total assets	Total assets	$	1,099,087	$	1,071,943	Total assets	$	821,640	$	963,515
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	6,962	$	8,216	Accounts payable	$	2,172	$	7,531
Commissions and advisory fees payable	Commissions and advisory fees payable	13,814		17,940		Commissions and advisory fees payable	14,883		13,829
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	54,707		65,678		Accrued expenses and other current liabilities	40,932		111,212
Current deferred revenue	Current deferred revenue	6,328		13,180		Current deferred revenue	5,663		4,583
Current lease liabilities	Current lease liabilities	5,025		4,896		Current lease liabilities	5,177		5,139
Current portion of long-term debt	Current portion of long-term debt	1,812		1,812		Current portion of long-term debt	10,125		—
Total current liabilities	Total current liabilities	88,648		111,722		Total current liabilities	78,952		142,294
Long-term liabilities:	Long-term liabilities:					Long-term liabilities:
Long-term debt, net	Long-term debt, net	553,476		553,134		Long-term debt, net	251,399		—
Long-term lease liabilities	Long-term lease liabilities	31,795		33,267		Long-term lease liabilities	28,622		30,332
Deferred tax liabilities, net	Deferred tax liabilities, net	19,125		20,124		Deferred tax liabilities, net	16,084		20,819
Long-term deferred revenue	Long-term deferred revenue	4,859		5,322		Long-term deferred revenue	3,933		4,396
Other long-term liabilities	Other long-term liabilities	11,731		6,752		Other long-term liabilities	31,450		22,476
Total long-term liabilities	Total long-term liabilities	620,986		618,599		Total long-term liabilities	331,488		78,023
Total liabilities	Total liabilities	709,634		730,321		Total liabilities	410,440		220,317

Commitments and contingencies (Note 8)		0		0
Commitments and contingencies (Note 9)						Commitments and contingencies (Note 9)

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common stock, par value $0.0001 per share—900,000 shares authorized; 50,921 shares issued and 47,740 shares outstanding as of June 30, 2022; 50,137 shares issued and 48,831 shares outstanding at December 31, 2021		5		5
Common stock, par value $0.0001 per share—900,000 shares authorized; 43,463 shares issued and 37,118 shares outstanding as of June 30, 2023; 51,260 shares issued and 48,079 shares outstanding as of December 31, 2022						Common stock, par value $0.0001 per share—900,000 shares authorized; 43,463 shares issued and 37,118 shares outstanding as of June 30, 2023; 51,260 shares issued and 48,079 shares outstanding as of December 31, 2022	4		5
Additional paid-in capital	Additional paid-in capital	1,628,591		1,619,805		Additional paid-in capital	1,387,591		1,636,134
Accumulated deficit	Accumulated deficit	(1,175,744)		(1,249,789)		Accumulated deficit	(824,288)		(829,542)

Treasury stock, at cost—3,181 shares as of June 30, 2022 and 1,306 shares as of December 31, 2021		(63,399)		(28,399)
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(12,061)		—
Treasury stock, at cost—6,345 shares as of June 30, 2023 and 3,181 shares as of December 31, 2022						Treasury stock, at cost—6,345 shares as of June 30, 2023 and 3,181 shares as of December 31, 2022	(140,046)		(63,399)
Total stockholders’ equity	Total stockholders’ equity	389,453		341,622		Total stockholders’ equity	411,200		743,198
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,099,087	$	1,071,943	Total liabilities and stockholders’ equity	$	821,640	$	963,515

See accompanying notes.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 5

~~BLUCORA,~~AVANTAX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~COMPREHENSIVE INCOME (LOSS)

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

See accompanying notes.

Avantax, Inc. | Q2 2023 Form 10-Q 6

AVANTAX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited) (In thousands)


								Accumulated other comprehensive loss
	Common stock			Additional paid-in capital		Accumulated deficit				Treasury stock
	Shares	Amount								Shares	Amount		Total
Balance as of December 31, 2022	51,260	$	5	$	1,636,134	$	(829,542)	$	—	3,181	$	(63,399)	$	743,198
Common stock issued pursuant to stock incentive and employee stock purchase plans	307	—		1,135		—		—		—	—		1,135
Stock repurchases	—	—		—		—		—		9,291	(279,562)		(279,562)
Retirement of common stock	(8,333)	(1)		(254,538)		—		—		(8,333)	254,539		—
Stock-based compensation	—	—		4,714		—		—		—	—		4,714
Tax payments from shares withheld for equity awards	—	—		(3,114)		—		—		—	—		(3,114)
Net income	—	—		—		1,673		—		—	—		1,673
Balance as of March 31, 2023	43,234	4		1,384,331		(827,869)		—		4,139	(88,422)		468,044
Common stock issued pursuant to stock incentive and employee stock purchase plans	229	—		1,506		—		—		—	—		1,506
Stock repurchases	—	—		—		—		—		2,206	(51,624)		(51,624)

Stock-based compensation	—	—		2,910		—		—		—	—		2,910
Tax payments from shares withheld for equity awards	—	—		(1,156)		—		—		—	—		(1,156)
Other comprehensive loss, net of tax	—	—		—		—		(12,061)		—	—		(12,061)
Net income	—	—		—		3,581		—		—	—		3,581
Balance as of June 30, 2023	43,463	$	4	$	1,387,591	$	(824,288)	$	(12,061)	6,345	$	(140,046)	$	411,200


								Accumulated other comprehensive loss
	Common stock			Additional paid-in capital		Accumulated deficit				Treasury stock
	Shares	Amount								Shares	Amount		Total
Balance as of December 31, 2021	50,137	$	5	$	1,619,805	$	(1,249,789)	$	—	1,306	$	(28,399)	$	341,622
Common stock issued pursuant to stock incentive and employee stock purchase plans	247	—		96		—		—		—	—		96
Stock repurchases	—	—		—		—		—		1,645	(30,537)		(30,537)
Stock-based compensation	—	—		4,641		—		—		—	—		4,641
Tax payments from shares withheld for equity awards	—	—		(1,569)		—		—		—	—		(1,569)

Net income	—	—		—		34,620		—		—	—		34,620
Balance as of March 31, 2022	50,384	5		1,622,973		(1,215,169)		—		2,951	(58,936)		348,873
Common stock issued pursuant to stock incentive and employee stock purchase plans	537	—		2,402		—		—		—	—		2,402
Stock repurchases	—	—		—		—		—		230	(4,463)		(4,463)
Stock-based compensation	—	—		3,683		—		—		—	—		3,683
Tax payments from shares withheld for equity awards	—	—		(467)		—		—		—	—		(467)

Net income	—	—		—		39,425		—		—	—		39,425
Balance as of June 30, 2022	50,921	$	5	$	1,628,591	$	(1,175,744)	$	—	3,181	$	(63,399)	$	389,453

See accompanying notes.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022 Form 10-Q 6~~

~~BLUCORA, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~~

~~(Unaudited) (In thousands)~~

Common stock Additional paid-in capital Accumulated deficit Treasury stock
Shares Amount Shares Amount Total
Balance as of December 31, 2021 50,137 $ 5 $ 1,619,805 $ (1,249,789) 1,306 $ (28,399) $ 341,622
Common stock issued pursuant to stock incentive and employee stock purchase plans 247 — 96 — — — 96
Stock repurchases — — — — 1,645 (30,537) (30,537)
Stock-based compensation — — 4,641 — — — 4,641
Tax payments from shares withheld for equity awards — — (1,569) — — — (1,569)
Net income — — — 34,620 — — 34,620
Balance as of March 31, 2022 50,384 $ 5 $ 1,622,973 $ (1,215,169) 2,951 $ (58,936) $ 348,873
Common stock issued pursuant to stock incentive and employee stock purchase plans 537 — 2,402 — — — 2,402
Stock repurchases — — — — 230 (4,463) (4,463)
Stock-based compensation — — 3,683 — — — 3,683
Tax payments from shares withheld for equity awards — — (467) — — — (467)
Net income — — — 39,425 — — 39,425
Balance as of June 30, 2022 50,921 $ 5 $ 1,628,591 $ (1,175,744) 3,181 $ (63,399) $ 389,453
Common stock Additional paid-in capital Accumulated deficit Treasury stock
Shares Amount Shares Amount Total
Balance as of December 31, 2020 49,483 $ 5 $ 1,598,230 $ (1,257,546) 1,306 $ (28,399) $ 312,290
Common stock issued pursuant to stock incentive and employee stock purchase plans 132 — 63 — — — 63
Stock-based compensation — — 5,520 — — — 5,520
Tax payments from shares withheld for equity awards — — (865) — — — (865)
Net income — — — 27,646 — — 27,646
Balance as of March 31, 2021 49,615 $ 5 $ 1,602,948 $ (1,229,900) 1,306 $ (28,399) $ 344,654
Common stock issued pursuant to stock incentive and employee stock purchase plans 347 — 1,989 — — — 1,989
Stock-based compensation — — 4,720 — — — 4,720
Tax payments from shares withheld for equity awards — — (464) — — — (464)
Net income — — — 31,608 — — 31,608
Balance as of June 30, 2021 49,962 $ 5 $ 1,609,193 $ (1,198,292) 1,306 $ (28,399) $ 382,507

~~See accompanying notes.~~

~~Blucora, Inc.~~ | ~~Q2 2022~~2023 Form 10-Q 7

~~BLUCORA,~~AVANTAX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

Six Months Ended June 30,
2022 2021
Operating activities:
Net income $ 74,045 $ 59,254
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of acquired intangible assets 22,769 21,583
Stock-based compensation 11,423 10,770
Change in the fair value of acquisition-related contingent consideration (5,320) 17,800
Reduction of right-of-use lease assets 715 1,420
Deferred income taxes (999) (963)
Amortization of debt discount and issuance costs 1,379 1,301
Accretion of lease liabilities 1,020 1,046
Other non-cash items 2,574 481
Changes in operating assets and liabilities, net of acquisitions and disposals:
Accounts receivable, net 1,666 (5,948)
Commissions and advisory fees receivable 3,859 (530)
Prepaid expenses and other current assets 1,776 (4,057)
Other long-term assets (8,804) (9,239)
Accounts payable (1,254) 874
Commissions and advisory fees payable (4,316) 149
Lease liabilities (2,491) (431)
Deferred revenue (7,315) (7,677)
Accrued expenses and other current and long-term liabilities (5,064) 11,438
Net cash provided by operating activities 85,663 97,271
Investing activities:
Purchases of property, equipment, and software (11,790) (13,544)
Asset acquisitions (1,858) (881)
Net cash used by investing activities (13,648) (14,425)
Financing activities:
Proceeds from credit facilities, net of debt discount and issuance costs — (502)
Payments on credit facilities (906) (906)
Acquisition-related contingent consideration payments (98) —
Stock repurchases (35,000) —
Proceeds from stock option exercises 174 284
Proceeds from issuance of stock through employee stock purchase plan 2,324 1,845
Tax payments from shares withheld for equity awards (2,036) (1,329)
Net cash used by financing activities (35,542) (608)
Net increase in cash, cash equivalents, and restricted cash 36,473 82,238
Cash, cash equivalents, and restricted cash, beginning of period 134,824 150,762
Cash, cash equivalents, and restricted cash, end of period $ 171,297 $ 233,000
Supplemental cash flow information:
Cash paid for income taxes $ 1,958 $ 596
Cash paid for interest $ 14,301 $ 14,324


	Six Months Ended June 30,
	2023		2022
Operating activities:
Net income	$	5,254	$	74,045
Less: Income from discontinued operations, net of income taxes	1,921		69,646
Income from continuing operations	3,333		4,399
Adjustments to reconcile income from continuing operations to net cash from operating activities:
Depreciation and amortization of acquired intangible assets	19,745		18,178
Stock-based compensation	11,093		9,818
Change in the fair value of acquisition-related contingent consideration	—		(5,320)


Reduction of right-of-use lease assets	805		715
Deferred income taxes	(858)		(1,023)
Amortization of debt discount and issuance costs	440		—


Accretion of lease liabilities	948		1,020

Other non-cash items	2,739		2,575
Changes in operating assets and liabilities, net of acquisitions and disposals:

Accounts receivable, net	(992)		4,430
Commissions and advisory fees receivable	(1,326)		3,859

Prepaid expenses and other current assets	(14,531)		(2,333)
Other long-term assets	(5,406)		(8,816)
Accounts payable	(5,359)		(4,178)
Commissions and advisory fees payable	1,054		(4,316)
Lease liabilities	(2,620)		(2,491)
Deferred revenue	617		(443)
Accrued expenses and other current and long-term liabilities	(84,901)		(1,166)
Net cash provided (used) by operating activities from continuing operations	(75,219)		14,908
Investing activities:
Purchases of property, equipment, and software	(5,499)		(9,019)

Asset acquisitions	(5,451)		(1,858)



Net cash used by investing activities from continuing operations	(10,950)		(10,877)
Financing activities:
Proceeds from credit facilities, net of debt discount and issuance costs	261,543		—
Payments on credit facilities	(1,688)		(906)
Acquisition-related fixed and contingent consideration payments	(287)		(98)

Stock repurchases	(328,119)		(35,000)


Proceeds from issuance of stock through employee stock purchase plan	1,584		2,324
Proceeds from stock option exercises	1,057		174
Tax payments from shares withheld for equity awards	(4,270)		(2,036)
Net cash used by financing activities from continuing operations	(70,180)		(35,542)
Net cash used by continuing operations	(156,349)		(31,511)
Net cash provided by operating activities from discontinued operations	—		32,980
Net cash provided (used) by investing activities from discontinued operations	2,212		(2,771)
Net cash provided by financing activities from discontinued operations	—		—
Net cash provided by discontinued operations	2,212		30,209

Net decrease in cash and cash equivalents	(154,137)		(1,302)
Cash and cash equivalents, beginning of period	263,928		100,629
Cash and cash equivalents, end of period	$	109,791	$	99,327

Supplemental cash flow information:

Cash paid for income taxes	$	97,420	$	1,958
Cash paid for interest	$	6,041	$	14,301

See accompanying notes.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 8

~~BLUCORA,~~AVANTAX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Description of the Business

~~Blucora,~~Avantax, Inc. (the “Company,” “Avantax,” “~~Blucora,” “we,” “our,~~we,” or “~~us”~~our,”or“us”) ~~operates 2 primary businesses: the Wealth Management~~is a leading provider of integrated tax-intelligent wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and ~~the digital Tax Software business.~~certified public accounting (

~~Wealth Management~~

“CPA”) firms. Our ~~Wealth Management business consists~~integrated tax-intelligent wealth management services consist of the operations of Avantax Wealth Management and Avantax Planning ~~Partners (collectively, the~~ ~~“Wealth Management business”~~ ~~or the~~ ~~“Wealth Management segment”~~).Partners.

Avantax Wealth Management provides ~~tax-focused~~tax-intelligent wealth management solutions for financial professionals, tax professionals, ~~certified public accounting (“CPA”~~)CPA firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, which is a leading U.S. tax-focused independent broker-dealer, registered investment advisor (“RIA”), and insurance agency ~~subsidiaries and is a leading U.S. tax-focused independent broker-dealer.~~subsidiaries. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer ~~tax-advantaged~~tax-intelligent planning, investing, and wealth management services to their clients.

Avantax Planning Partners is an in-house/employee-based RIA, insurance agency, and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services.

Divestiture of Tax Software Business

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

In accordance with ASC 205 (“~~HKFS”~~ASC 205”)~~. We acquired HKFS in July 2020 (the~~, ~~“HKFS Acquisition”~~Presentation of Financial Statements), we determined that the sale of our tax software business represented a strategic shift that will have a major effect on our operations and ~~subsequently rebranded it in order to create tighter brand alignment through one common and recognizable brand. Any reference to Avantax Planning Partners in this Form 10-Q is inclusive of HKFS.~~

~~Tax Software~~

~~Our Tax Software business consists~~financial results. As a result of the TaxAct Sale, the historical results of our former tax software business, and any adjustments to amounts previously reported in discontinued operations ~~of TaxAct, Inc. (“TaxAct,”~~in a prior period (if applicable) have been reclassified as a discontinued operation and are excluded from continuing operations for all periods presented within the condensed consolidated financial statements.~~“Tax Software business,”~~ ~~or the~~ ~~“Tax Software segment”) and provides digital tax preparation services and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com and its mobile applications.~~

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

Segments

~~We have 2~~Our Chief Executive Officer is our chief operating decision maker and assesses performance and allocates resources on a consolidated basis. Given the similarities in economic characteristics between our operations and the common nature of the products, services, we currently operate in one reportable ~~segments: (1) the Wealth Management segment and (2) the Tax Software~~ segment.

Note 2: Summary of Significant Accounting Policies

Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared by us under the rules and regulations of the SEC for interim financial reporting. These condensed consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the condensed consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in conformity with ~~United States~~accounting principles generally accepted ~~accounting principles~~in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial

Avantax, Inc. | Q2 2023 Form 10-Q 9

statements and accompanying notes in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. Interim results are not necessarily indicative of results for a full year.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 9~~

A summary of our significant accounting policies is included in Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, ~~2021. There~~2022. Other than below, there have been no significant changes in our significant accounting policies since December 31, ~~2021.~~2022.

Derivative Financial Instruments

We primarily enter into derivative financial instruments as part of our strategy to manage our exposure to changes in interest rates. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as an interest rate or index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. We do not enter into derivative instruments for any purpose other than hedging interest rate risk, and none of our derivative instruments are used for trading purposes.

We recognize derivatives as assets or liabilities on our consolidated balance sheets at their fair value in accordance with ASC 815, Derivatives and Hedging. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Currently, we have only designated derivative instruments as cash flow hedges. We may also enter into derivative contracts that are intended to economically hedge interest rate risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.

To qualify for hedge accounting, concurrent with the execution of a derivative contract, we formally document our risk management objective and strategy for undertaking the hedging transaction, how the hedging instrument is expected to hedge the designated risk related to the hedged item, and the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship.

For derivatives designated as cash flow hedging instruments, changes in fair value are initially recorded net of tax in accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged transaction affects earnings. Additionally, changes in the fair value of amounts excluded from the assessment of effectiveness are recorded net of tax in accumulated other comprehensive income (loss) and recognized in earnings using a straight-line amortization method over the term of instrument. Changes in fair value for derivative contracts that do not qualify for hedge accounting (or for those that we elect to not apply hedge accounting), are immediately recognized within earnings. Realized and unrealized gains and losses for derivatives are presented in the statements of comprehensive income (loss) based on the nature and use of the instrument.

We prospectively discontinue hedge accounting if it is determined that the derivative is no longer effective in offsetting the designated risk of the hedged item, the derivative is terminated prior to maturity, or the occurrence of the forecasted transaction (for a cash flow hedge) is no longer probable. When hedge accounting for a cash flow hedge is discontinued, any subsequent changes in fair value of the derivative are recognized immediately in earnings. The cumulative unrealized gain or loss related to the discontinued hedge continues to be reported in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the same manner discussed above, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period, in which case the cumulative unrealized gain or loss is reclassified into earnings immediately.

Note 3: ~~Segment Information~~Discontinued Operations

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

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

We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, or contested proxy and other legal and consulting costswas determined to ~~the reportable segments. Such amounts are reflected~~meet discontinued operations accounting criteria under the heading “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, or income taxes to the reportable segments. We do not report assets or capital expenditures by segment to the chief operating decision maker.

~~Information on reportable segments currently presented to our chief operating decision maker and a reconciliation to consolidated net income are presented below (in thousands):~~
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue:
Wealth Management $ 162,669 $ 162,395 $ 329,072 $ 316,886
Tax Software 94,214 91,917 235,364 215,809
Total revenue 256,883 254,312 564,436 532,695
Operating income (loss):
Wealth Management 15,873 21,396 32,294 40,792
Tax Software 53,859 63,448 111,889 114,336
Corporate-level activity (18,947) (43,218) (48,355) (76,273)
Total operating income 50,785 41,626 95,828 78,855
Interest expense and other, net (8,117) (8,024) (15,958) (15,907)
Income before income taxes 42,668 33,602 79,870 62,948
Income tax expense (3,243) (1,994) (5,825) (3,694)
Net income $ 39,425 $ 31,608 $ 74,045 $ 59,254
ASC 205.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 10

~~Wealth Management~~During the six months ended June 30, 2023, we finalized our previously estimated closing date working capital balance, resulting in an incremental pre-tax gain of $2.5 million which is included within “Pre-tax gain on disposal” in the condensed consolidated statements of comprehensive income (loss).

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenues	$	—	$	94,214	$	—	$	235,364
Operating expenses	—		40,435		—		123,154
Interest expense and other, net	—		(7,905)		—		(15,693)
Income from discontinued operations before gain on disposal and income taxes	—		45,874		—		96,517
Pre-tax gain on disposal	—		—		2,539		—
Income from discontinued operations before income taxes	—		45,874		2,539		96,517
Income tax expense	—		(7,296)		(618)		(26,871)
Income from discontinued operations	$	—	$	38,578	$	1,921	$	69,646

Note 4: Revenue Recognition

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

Revenues by major category ~~within the Wealth Management segment~~ and the timing of ~~Wealth Management~~ revenue recognition was as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Recognized upon transaction:
Commission $ 17,881 $ 21,076 $ 38,505 $ 43,443
Transaction and fee 1,262 1,192 2,506 2,566
Total revenue recognized upon transaction $ 19,143 $ 22,268 $ 41,011 $ 46,009
Recognized over time:
Advisory $ 104,155 $ 96,508 $ 211,324 $ 187,627
Commission 24,954 30,626 51,985 60,793
Asset-based 6,964 5,526 12,627 10,855
Transaction and fee 7,453 7,467 12,125 11,602
Total revenue recognized over time $ 143,526 $ 140,127 $ 288,061 $ 270,877
Total Wealth Management revenue:
Advisory $ 104,155 $ 96,508 $ 211,324 $ 187,627
Commission 42,835 51,702 90,490 104,236
Asset-based 6,964 5,526 12,627 10,855
Transaction and fee 8,715 8,659 14,631 14,168
Total Wealth Management revenue $ 162,669 $ 162,395 $ 329,072 $ 316,886

~~Tax Software Revenue Recognition~~

We generate Tax Software revenue from the sale of digital tax preparation services, packaged tax preparation software, ancillary services, and multiple element arrangements that may include a combination of these items.

~~Revenues by major category within the Tax Software segment and the timing of Tax Software revenue recognition was as follows (in thousands):~~

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Recognized upon transaction:
Consumer $ 90,963 $ 88,846 $ 216,224 $ 199,413
Professional 2,164 2,128 15,948 14,255
Total revenue recognized upon transaction $ 93,127 $ 90,974 $ 232,172 $ 213,668
Recognized over time:
Consumer $ 64 $ — $ 64 $ —
Professional 1,023 943 3,128 2,141
Total revenue recognized over time $ 1,087 $ 943 $ 3,192 $ 2,141
Total Tax Software revenue:
Consumer $ 91,027 $ 88,846 $ 216,288 $ 199,413
Professional 3,187 3,071 19,076 16,396
Total Tax Software revenue $ 94,214 $ 91,917 $ 235,364 $ 215,809


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Recognized upon transaction:
Commission	$	18,084	$	17,881	$	36,885	$	38,505
Transaction and fee	1,079		1,262		2,012		2,506
Total revenue recognized upon transaction	$	19,163	$	19,143	$	38,897	$	41,011
Recognized over time:
Advisory	$	103,316	$	104,155	$	200,841	$	211,324
Commission	23,755		24,954		46,426		51,985
Asset-based	33,193		6,964		67,080		12,627
Transaction and fee	7,501		7,453		11,664		12,125
Total revenue recognized over time	$	167,765	$	143,526	$	326,011	$	288,061
Total revenue:
Advisory	$	103,316	$	104,155	$	200,841	$	211,324
Commission	41,839		42,835		83,311		90,490
Asset-based	33,193		6,964		67,080		12,627
Transaction and fee	8,580		8,715		13,676		14,631
Total revenue	$	186,928	$	162,669	$	364,908	$	329,072

Note 4:5: Asset Acquisitions

During the six months ended June 30, ~~2022,~~2023, we completed acquisitions ~~in our Wealth Management business~~ that met the criteria to be accounted for as asset acquisitions. Total initial purchase consideration, including acquisition costs and fixed deferred payments, was ~~$2.2~~$4.9 million. This purchase consideration was allocated to ~~the~~

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 11~~

~~acquired assets, primarily customer~~client relationship intangibles. ~~Customer~~Client relationship intangibles are amortized on a straight-line basis over an amortization period of 15 years.

We are subject to variable contingent consideration payments related to our asset acquisitions that are not recognized as a liability on our condensed consolidated balance sheets until all contingencies related to the achievement of future financial targets are resolved and the consideration is ~~paid.~~payable. As of June 30, ~~2022,~~2023, the maximum future fixed and contingent payments associated with all prior asset acquisitions were ~~$19.2~~$27.5 million, with specified payment dates from ~~2022~~2023 through ~~2026.~~2027.

Avantax, Inc. | Q2 2023 Form 10-Q 11

Note 5:6: Debt

Our debt consisted of the following as of the periods indicated in the table below (in thousands):
June 30,
2022 December 31,
2021
Senior Secured Credit Facility
Principal outstanding $ 560,438 $ 561,344
Unamortized debt issuance costs (2,714) (3,371)
Unamortized debt discount (2,436) (3,027)
Net carrying value $ 555,288 $ 554,946


	June 30, 2023		December 31, 2022
	Delayed Draw Term Loan Facility
Principal outstanding	$	268,313	$	—
Unamortized debt issuance costs	(5,505)		—
Unamortized debt discount	(1,284)		—
Net carrying value	$	261,524	$	—

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

On January 24, 2023 (the “Closing Date”), we entered into a restatement agreement (the “Amended and Restated Credit Agreement”), which amended ~~the~~and restated in its entirety our previous Credit Agreement. The Amended and Restated Credit Agreement provides for a new delayed draw term loan facility up to a maximum principal amount of $270.0 million (the “~~Senior Secured~~Delayed Draw Term Loan Facility”) and a revolving credit facility with a commitment amount of $50.0 million (the “Revolving Credit Facility”). ~~The~~We may borrow term loans under the Delayed Draw Term Loan ~~has a~~Facility (the “Term Loans”) until January 24, 2024. The stated maturity date of ~~May 22, 2024~~the Delayed Draw Term Loan Facility and the Revolving Credit Facility is January 24, 2028 (the “~~Term Loan~~ Maturity Date”). The proceeds of any Term Loans may be used to fund shareholder distributions and for general corporate purposes. The proceeds of any loans under the Revolving Credit Facility may be used to finance working capital needs and for general corporate purposes. On ~~April 26, 2021, to ensure adequate liquidity and flexibility to support~~February 24, 2023, we borrowed $170.0 million under the ~~Company’s growth,~~Delayed Draw Term Loan Facility. During the second quarter of 2023, we ~~entered into Amendment No. 5 to~~borrowed the ~~Credit Agreement (the~~ ~~“Credit Agreement Amendment”). Pursuant to~~remaining $100.0 million available under the Credit Agreement Amendment, the Credit Agreement was amended to, among other things, refinance the existing $65.0 million Revolver and add $25.0 million of additional revolving credit commitments, for an aggregate principal amount of $90.0 million in revolving credit commitments (the ~~“New Revolver”). The New Revolver has a maturity date of February 21, 2024 (the~~ ~~“New Revolver Maturity Date”~~).Delayed Draw Term Loan Facility.

~~The Company~~We capitalized approximately ~~$0.5~~$8.5 million of debt discount and issuance costs ~~paid~~ in connection with the Amended and Restated Credit ~~Agreement Amendment, which~~Agreement. A portion of these costs were allocated to the Revolving Credit Facility and are included in other long-term assets on the Company’s condensed consolidated balance ~~sheets as part of the total deferred financing costs associated with the New Revolver.~~sheets.

As of June 30, 2022, the Senior Secured Credit Facility provided for up to $765.0 million of borrowings and consisted of a committed $90.0 million under the New Revolver and a $675.0 million Term Loan. As of June 30, 2022,2023, we had ~~$560.4~~$268.3 million in principal amount outstanding under the Delayed Draw Term Loan Facility and no amounts outstanding under the ~~New Revolver. Based on aggregate loan commitments as~~Revolving Credit Facility. As of June 30, ~~2022, approximately $90.0~~2023, $50.0 million was available for future borrowings under the ~~Senior Secured~~Revolving Credit Facility, subject to customary terms and conditions. Subject to certain conditions set forth in the Amended and Restated Credit Agreement, we may borrow, prepay, and reborrow under the Revolving Credit Facility and terminate or reduce the Lenders’ commitments at any time prior to the Maturity Date.

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

Commencing with the first year ending December 31, 2023, we may be required to make annual prepayments on the Term ~~Loan~~Loans in ~~certain circumstances, including in the event that the Company generates~~an amount equal to a percentage of Excess Cash Flow (as defined in the Credit Agreement) in a given fiscal year. The Credit Agreement permits the Company to voluntarily prepay the Term Loan without premium or penalty. In addition, the Company is required to make principal amortization payments on the Term Loan quarterly on the last business day of each March, June, September,Amended and December, in an amount equal to approximately $0.5 million (subject to reduction for prepayments), with the remaining principal amount of the Term Loan due on the Term Loan Maturity Date. On August 5, 2022, and as provided for within our Senior Secured Credit Facility, we voluntarily prepaid $35.0 million of principal outstanding under our Term Loan. We also settled the accrued and unpaid interest on the applicable principal outstanding up to, but not including, the date of prepayment.

The interest rate on the Term Loan is variable at the London Interbank Offered Rate (subject to a floor of 1.0%), plus the applicable interest rate margin of 4.0% for Eurodollar Rate Loans (as defined in the Credit Agreement) and 3.0% for ABR Loans (as defined in theRestated Credit Agreement). AsThe percentage of ~~June 30, 2022, the applicable interest rate~~Excess Cash Flow ranges from 0% to 50% depending on ~~the Term Loan was 5.0%. Depending on the~~our Consolidated First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement). We may voluntarily prepay the Term Loans in whole or in part without premium or penalty.

Subject to customary reference rate availability provisions, the borrowings under the Amended and Restated Credit Agreement will bear interest at a rate per annum equal to (i) the Term SOFR Rate (as defined in the Amended and Restated Credit Agreement, and which includes a 0.10% credit spread adjustment) plus a margin ranging from 2.25% to 2.75% (which margin would be 2.75% as of the Closing Date), ~~the applicable interest~~or (ii) a base rate ~~margin~~based on the ~~New Revolver ranges from 2.0% to 2.5% for Eurodollar Rate Loans~~highest of the Wall Street Journal prime rate, the federal funds rate plus 0.50% and ~~1.0% to 1.5% for ABR Loans. The Company is required to pay~~the Term SOFR (as defined in the Amended and Restated Credit Agreement, and which includes a ~~commitment fee on the undrawn commitment under the New Revolver in a percentage that is dependent on the Consolidated First Lien Net~~0.10% credit spread adjustment) rate plus

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 12

1.00%, in each case plus a margin ranging from 1.25% to 1.75% (which margin would be 1.75% as of the Closing Date). The margin is determined based on the Company’s Consolidated First Lien Net Leverage Ratio ~~that ranges~~(as defined in the Amended and Restated Credit Agreement). We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility ranging from 0.35% to ~~0.4%~~0.45%. Interest is payable at the end of each interest period, typically quarterly.

~~Obligations~~The obligations of the Company under the ~~Senior Secured~~Amended and Restated Credit ~~Facility~~Agreement are ~~guaranteed~~secured by ~~certain~~a first-priority security interest in substantially all of the ~~Company’s subsidiaries~~existing and ~~secured by substantially all the assets~~future personal property of the Company and certain of its subsidiaries (including certain subsidiaries acquired in the acquisition of Avantax Planning Partners and certain other material subsidiaries). The Senior Secured Credit Facility includes financial and operating covenants (including a Consolidated Total Net Leverage Ratio), which are set forth in detail in the Credit Agreement.subsidiaries.

Pursuant to the Amended and Restated Credit Agreement, ~~Amendment, if the Company’s usage of the New Revolver exceeds 30% of the aggregate commitments under the New Revolver on the last day of any calendar quarter, the Company~~we shall not permit (i) the Consolidated Total Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) to exceed ~~(i) 4.75 to 1.00 for the period beginning on April 1, 2021 and ending on December 31, 2021, (ii) 4.25 to 1.00 for the period beginning on January 1, 2022 and ending on September 30, 2022, (iii)~~ 4.00 to 1.00 ~~for the period beginning on October 1, 2022~~between March 31, 2023 and ~~ending on December 31, 2022, and (iv) 3.50~~June 30, 2024, or 3.75 to 1.00 ~~for~~between July 1, 2024 and the ~~period beginning~~Maturity Date, (ii) the Consolidated Fixed Charge Coverage Ratio (as defined in the Amended and Restated Credit Agreement) to be less than 1.25 to 1.00 or (iii) Liquidity (as defined in the Amended and Restated Credit Agreement) on ~~January 1, 2023 and ending on February 21, 2024.~~

~~Except as described above,~~ the ~~New Revolver has substantially the same terms as the previous Revolver, including certain covenants and events~~last day of ~~default.~~any fiscal quarter to be less than $50 million. The Company was in compliance with the debt covenants of the ~~Senior Secured~~Amended and Restated Credit ~~Facility~~Agreement as of June 30, ~~2022.~~2023.

Note 6:7: Leases

Our leases are primarily related to office space and are classified as operating leases. Operating lease cost, net of sublease income, is recognized in “General and administrative” expense for those net costs related to leases used in our operations and within “Acquisition and integration” expense for those net costs related to an unoccupied lease assumed in a previous acquisition on the condensed consolidated statements of ~~operations.~~comprehensive income (loss).

During the three and six months ended June 30, 2023, and in connection with the TaxAct Sale, we began subleasing a portion of our corporate headquarters in Dallas, Texas. This sublease was classified as an operating lease at inception, with sublease income recognized on a straight-line basis over the five-year sublease term.

Operating lease cost, net of sublease income, and cash paid on operating lease liabilities for the three and six months ended June 30, ~~2022~~2023 and ~~2021~~2022 were as follows (in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Fixed lease cost	Fixed lease cost	$	947	$	1,099	$	1,920	$	2,253	Fixed lease cost	$	974	$	947	$	1,936	$	1,920
Variable lease cost	Variable lease cost	363		102		765		245		Variable lease cost	340		363		748		765
Operating lease cost, before sublease income	Operating lease cost, before sublease income	1,310		1,201		2,685		2,498		Operating lease cost, before sublease income	1,314		1,310		2,684		2,685
Sublease income	Sublease income	(234)		(116)		(468)		(232)		Sublease income	(479)		(234)		(958)		(468)
Total operating lease cost, net of sublease income	Total operating lease cost, net of sublease income	$	1,076	$	1,085	$	2,217	$	2,266	Total operating lease cost, net of sublease income	$	835	$	1,076	$	1,726	$	2,217

Additional lease information:	Additional lease information:									Additional lease information:
Cash paid on operating lease liabilities	Cash paid on operating lease liabilities	$	1,262	$	228	$	2,491	$	445	Cash paid on operating lease liabilities	$	1,312	$	1,262	$	2,619	$	2,491
Lease liabilities obtained from new right-of-use assets	Lease liabilities obtained from new right-of-use assets	$	128	$	93	$	128	$	93	Lease liabilities obtained from new right-of-use assets	$	—	$	128	$	—	$	128

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


		June 30, 2022			December 31, 2021				June 30, 2023			December 31, 2022
Right-of-use assets, net	Right-of-use assets, net	$	19,879		$	20,466		Right-of-use assets, net	$	18,556		$	19,361

Current lease liabilities	Current lease liabilities	$	5,025		$	4,896		Current lease liabilities	$	5,177		$	5,139
Long-term lease liabilities	Long-term lease liabilities	31,795			33,267			Long-term lease liabilities	28,622			30,332
Total operating lease liabilities	Total operating lease liabilities	$	36,820		$	38,163		Total operating lease liabilities	$	33,799		$	35,471

Weighted-average remaining lease term (in years)	Weighted-average remaining lease term (in years)	9.9			10.3			Weighted-average remaining lease term (in years)	9.1			9.4
Weighted-average discount rate	Weighted-average discount rate	5.4		%	5.4		%	Weighted-average discount rate	5.5		%	5.5		%

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 13

The maturities of our operating lease liabilities as of June 30, ~~2022~~2023 were as follows (in thousands):


Undiscounted cash flows:	Undiscounted cash flows:			Undiscounted cash flows:
Remainder of 2022		$	2,583
2023		5,226
Remainder of 2023				Remainder of 2023	$	2,670
2024	2024	5,121		2024	5,184
2025	2025	5,023		2025	5,086
2026	2026	4,193		2026	4,256
2027				2027	3,858
Thereafter	Thereafter	26,130		Thereafter	22,315
Total undiscounted cash flows	Total undiscounted cash flows	48,276		Total undiscounted cash flows	43,369
Imputed interest	Imputed interest	(11,456)		Imputed interest	(9,570)
Present value of cash flows	Present value of cash flows	$	36,820	Present value of cash flows	$	33,799

Note 7:8: Balance Sheet Components

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


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Prepaid expenses	Prepaid expenses	$	12,260	$	13,138	Prepaid expenses	$	22,499	$	7,857

Forgivable loans						Forgivable loans	6,023		5,951
Other current assets	Other current assets	5,437		5,338		Other current assets	1,532		1,219
Total prepaid expenses and other current assets	Total prepaid expenses and other current assets	$	17,697	$	18,476	Total prepaid expenses and other current assets	$	30,054	$	15,027

Accrued expenses and other current liabilities consisted of the following (in thousands):
June 30, 2022 December 31, 2021
Salaries and related benefit expenses $ 17,151 $ 26,417
HKFS Contingent Consideration liability (1)
22,980 28,300
Accrued legal costs 1,512 2,871
Accrued vendor and advertising costs 3,337 3,777
Accrued taxes 5,495 —
Other 4,232 4,313
Total accrued expenses and other current liabilities $ 54,707 $ 65,678
~~__________________________~~


	June 30, 2023		December 31, 2022
Salaries and related benefit expenses	$	12,891	$	17,481



Accrued legal costs	2,897		1,102
Accrued vendor and advertising costs	1,411		2,726
Accrued taxes	5,076		85,965
Accrued fixed and variable acquisition consideration	1,139		897
Accrued cash-settled stock-based compensation	6,783		2,121
Interest rate derivatives	8,517		—
Other	2,218		920
Total accrued expenses and other current liabilities	$	40,932	$	111,212

~~(1)~~Other long-term liabilities consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Deferred compensation	$	12,235	$	7,974
Accrued cash-settled stock-based compensation	3,864		7,556
Accrued tax positions	4,099		3,616
Interest rate derivatives	8,309		—
Other	2,943		3,330
Other long-term liabilities	$	31,450	$	22,476

Avantax, Inc.~~For more information on the Company’s contingent liabilities, see "Note 8—Commitments and Contingencies."~~ | Q2 2023 Form 10-Q 14

Note 8:9: Commitments and Contingencies

~~HKFS Contingent Consideration Liability~~TaxAct Indemnification Obligations

~~On July 1, 2020,~~In connection with the TaxAct Sale, we closed the acquisition of Avantax Planning Partners, formerly “HKFS”, for an upfront cash purchase price of $104.4 million. The purchase price was subject to variable contingent consideration, or earn-out payments (the ~~“HKFS Contingent Consideration”) totaling a maximum of $60.0 million.~~

~~The HKFS Contingent Consideration to be paid is determined based on advisory asset levels and the achievement of~~have certain ~~performance goals (i) for the period beginning July 1, 2020 and ending June 30, 2021 and (ii) for the period beginning July 1, 2021 and ending June 30, 2022. Pursuant~~indemnification obligations to the ~~Stock Purchase Agreement, dated~~Buyer, TaxAct Holdings, Inc. and their respective affiliates and representatives with respect to certain losses actually incurred or suffered as a result of ~~January 6, 2020, by and among the Company, HKFS, the selling stockholders named therein (the~~ ~~“Sellers”), and JRD Seller Representative, LLC, as the Sellers’ representative (as amended on April 7, 2020, June 30, 2020, and June 29, 2021) (the~~ ~~“HKFS Purchase Agreement”~~), the maximum aggregate amount that we would be required to pay for each earn-out period is $30.0 million. If the asset market values on the applicable measurement date fall below certain specified thresholds, no paymentany claim, action, suit, or proceeding against such indemnitees arising out of ~~consideration is owed~~or relating to the ~~Sellers for such period.~~

~~Based on advisory asset levels~~use by us or any of our affiliates in the tax software business of website tracking and ~~the achievement of performance goals for the first earn-out period, we paid the full $30.0 million~~analytics technologies prior to the ~~Sellers in the third quarter of 2021. Based on ending advisory asset levels and the achievement of performance goals specified in the HKFS Purchase Agreement, the fair value~~closing of the ~~HKFS Contingent Consideration~~TaxAct Sale. Such indemnification obligations terminate on December 19, 2027 and may not exceed $5.4 million ($1.0 million of which is allocable to the deductible under our insurance policies). We believe that applicable insurance policies will cover all or a substantial portion of any claims made by the Buyer under such indemnification obligations. The current carrying amount of the liability for ~~the second earn-out period was $23.0~~these indemnification obligations is approximately $0.9 million as of June 30, ~~2022~~2023 and is ~~expected to~~

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 14~~

~~be paid in the third quarter of 2022. For additional information~~included within “Other long-term liabilities” on the ~~valuation of the HKFS Contingent Consideration liability, see "Note 9—Fair Value Measurements."~~condensed consolidated balance sheets.

Litigation

From time to time, we are subject to various legal proceedings, regulatory matters or fines, or claims that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Although we believe that resolving such claims, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties.

We are not currently a party to any such matters for which we have recognized a material liability on our condensed consolidated balance sheet as of June 30, ~~2022.~~2023.

We have entered into indemnification agreements in the ordinary course of business with our officers and directors. Pursuant to these agreements, we may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to our obligations under these indemnification agreements and applicable Delaware law.

Avantax, Inc. | Q2 2023 Form 10-Q 15

Note 9:10: Fair Value Measurements

Certain of our assets and liabilities are carried at fair value and are valued using inputs that are classified in one of the following three categories:

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

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

•Level 3: Unobservable inputs that are not corroborated by market data and reflect our own assumptions.

Assets and Liabilities Measured on a Recurring Basis

The fair value hierarchy of our financial assets and liabilities carried at estimated fair value and measured on a recurring basis were as follows (in thousands):
Fair value measurements at the reporting date using
June 30, 2022 Quoted prices in
active markets
using identical
assets
(Level 1) Significant other
observable
inputs
(Level 2) Significant
unobservable
inputs
(Level 3)
Cash equivalents: money market and other funds $ 4,302 $ 4,302 $ — $ —
Deferred compensation assets 2,554 2,554 — —
Total assets at fair value $ 6,856 $ 6,856 $ — $ —
HKFS Contingent Consideration liability $ 22,980 $ — $ — $ 22,980
Deferred compensation liabilities 2,554 2,554 — —
Total liabilities at fair value $ 25,534 $ 2,554 $ — $ 22,980
Fair value measurements at the reporting date using
December 31, 2021 Quoted prices in
active markets
using identical
assets
(Level 1) Significant other
observable
inputs
(Level 2) Significant
unobservable
inputs
(Level 3)
Cash equivalents: money market and other funds $ 4,293 $ 4,293 $ — $ —
Total assets at fair value $ 4,293 $ 4,293 $ — $ —
HKFS Contingent Consideration liability $ 28,300 $ — $ — $ 28,300
Total liabilities at fair value $ 28,300 $ — $ — $ 28,300


			Fair value measurements at the reporting date using
	June 30, 2023		Quoted prices in active markets using identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)


Cash equivalents: money market and other funds	$	216	$	216	$	—	$	—

















Deferred compensation assets	12,710		12,710		—		—
Total assets at fair value	$	12,926	$	12,926	$	—	$	—

Deferred compensation liabilities	$	12,710	$	12,710	$	—	$	—
Interest rate derivatives	16,814		—		16,814		—
Total liabilities at fair value	$	29,524	$	12,710	$	16,814	$	—


			Fair value measurements at the reporting date using
	December 31, 2022		Quoted prices in active markets using identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash equivalents: money market and other funds	$	4,369	$	4,369	$	—	$	—
Deferred compensation assets	7,974		7,974		—		—
Total assets at fair value	$	12,343	$	12,343	$	—	$	—


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

Cash equivalents are classified within Level 1 of the fair value hierarchy because we value them utilizing quoted prices in active markets.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 15~~

We offer non-qualified deferred compensation plans to our executive officers, board of directors, and certain independent financial professionals. Participants in these plans direct the investment of their accounts among the available investment options, which are generally the same as those available under our 401(k) plan. We have elected to fund these obligations through a rabbi trust which mirrors the investment elections made by participants. The assets in the rabbi trust are held for the purpose of satisfying our obligations to participants, however, remain subject to the claims of our creditors in the event we become insolvent. Our obligations and corresponding investments held under these non-qualified deferred compensation plans primarily consist of money market and mutual funds and are classified within Level 1 of the fair value hierarchy because we value them utilizing quoted prices in active markets. These investments, and the corresponding deferred compensation liabilities, are primarily included within “Other long-term assets” and “Other long-term ~~liabilities”,~~liabilities,” respectively, on the condensed consolidated balance sheets.

~~The HKFS Contingent Consideration liability relates~~

Avantax, Inc. | Q2 2023 Form 10-Q 16

We utilize a third-party pricing service to post-closing earn-out payments resulting from the acquisition of Avantax Planning Partners, formerly “HKFS” (see “Note 8—Commitments and Contingencies”). The fair value of the HKFS Contingent Consideration liability as of June 30, 2022 was calculated in accordance with the amended HKFS Purchase Agreement and was based on advisory asset levels as of June 30, 2022 (the measurement date for the second earn-out payment). Prior to this measurement date, the estimated fair value of the HKFS Contingent Consideration liability was determined using a Monte Carlo simulation model and certain Level 3 inputs previously disclosed within our Annual Report on Form 10-K. The HKFS Contingent Consideration liability is included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets and is expected to be paid in the third quarter of 2022.

~~A roll forward of the HKFS Contingent Consideration liability is as follows (in thousands):~~


	~~HKFS Contingent Consideration liability~~



~~Balance as of December 31, 2020~~	$	~~35,900~~
~~HKFS Contingent Consideration first earn-out payment~~	~~(30,000)~~
~~Change in fair value~~	~~22,400~~
~~Balance as of December 31, 2021~~	~~28,300~~
~~Change in fair value~~	~~(5,320)~~
~~Balance as of June 30, 2022~~	$	~~22,980~~

~~Changes in~~estimate the fair value of ~~this contingent consideration~~our derivative financial instruments. Fair value is estimated using industry standard valuation models that primarily rely on observable market inputs, including daily simple secured overnight financing rates (“SOFR”) overnight index swap rate curves, SOFR swap rate curves, and volatility. Credit valuation adjustments are ~~reflected~~incorporated in ~~“Acquisition~~the fair values to reflect nonperformance risk for both the Company and ~~integration” on~~our counterparties. Although we have determined that the ~~condensed consolidated statements~~majority of ~~operations.~~the inputs used to value these derivative instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads. We have determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, we have classified our derivative financial instruments in Level 2 of the fair value hierarchy.

Fair Value of Financial Instruments

We consider the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, financial professional loans, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.

As of June 30, ~~2022,~~2023, the ~~Term Loan’s~~ principal amount outstanding for our Delayed Draw Term Loan Facility was ~~$560.4 million, and the~~$268.3 million. The principal amount outstanding approximated its fair value as it is a variable rate instrument, and its applicable margin is consistent with current market conditions.

Note 11: Derivative Financial Instruments

We primarily enter into derivative financial instruments as part of our strategy to manage our exposure to changes in interest rates. Our objective in using interest rate derivatives is to reduce variability in the future cash flows we earn from our cash sweep program by limiting our exposure to changes in our contractually specified rate, which is primarily tied to the federal funds rate. To accomplish this objective, we currently utilize interest rate collar and interest rate cap derivative instruments. Our interest rate collar derivatives involve the payment of variable-rate amounts if interest rates rise above the cap strike rate on the contracts and receipts of fixed-rate amounts if interest rates fall below the floor strike rate on the contracts. Our interest rate cap derivatives involve the payment of variable-rate amounts if interest rates rise above the cap strike rate on the contracts. Our interest rate collar derivatives are designated and qualify as cash flow hedges, as defined in ASC 815. Our interest rate cap derivatives do not qualify for cash flow hedge accounting and are considered economic hedges. As of June 30, 2023, the total notional value of our interest rate derivatives represented approximately 64% of the ~~Term Loan’s principal~~ending client cash balances in our cash sweep program.

We are exposed to credit risk in the event of nonperformance of counterparties for our derivative financial instruments. We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount ~~was $540.8 million. As~~ of ~~December 31, 2021,~~credit exposure to individual counterparties and actively monitoring counterparty credit ratings. We also employ master netting arrangements which allow us to net settle positive and negative positions (assets and liabilities) arising from different transactions with the ~~Term Loan’s principal amount was $561.3 million, and~~same counterparty. Although not completely eliminated, we do not consider the ~~fair value~~risk of ~~the Term Loan’s principal amount was $559.9 million. The fair value~~counterparty default to be significant as a result of ~~the Term Loan’s principal amount was based~~these protections. Further, none of our derivative financial instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on ~~Level 2 inputs~~our credit ratings from ~~a third-party market quotation.~~any credit rating agency.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 1617

We recognize derivative financial instruments in the condensed consolidated financial statements at fair value regardless of the purpose or intent for holding the instruments. The following table presents the gross fair value of our derivative financial instruments as of June 30, 2023 and December 31, 2022 (in thousands):


	Derivative Assets				Derivative Liabilities
	June 30,		December 31,		June 30,		December 31,
	2023		2022		2023		2022
Derivatives designated as hedging instruments under ASC 815:
Interest rate collars (1)	$	—	$	—	$	15,938	$	—

Total derivatives designated as hedging instruments under ASC 815	—		—		15,938		—

Derivatives not designated as hedging instruments under ASC 815:

Interest rate caps (1)	—		—		876		—
Total derivatives not designated as hedging instruments under ASC 815	—		—		876		—
Total Derivatives	$	—	$	—	$	16,814	$	—

______________________

(1)As of June 30, 2023, approximately $8.5 million of the fair value of these derivative financial instruments was recorded within “Accrued expenses and other current liabilities,” with the remaining balance recorded within “Other long-term liabilities” on the condensed consolidated balance sheets.

Cash Flow Hedges of Interest Rate Risk

During the second quarter of 2023, we entered into two interest rate collar derivative contracts for a total notional value of $1.5 billion. Each contract is indexed to daily simple SOFR and is a combination of a purchased floor instrument with a strike rate of 2.5% and a sold cap instrument with a strike rate of 5.5%, both of which expire on May 31, 2026. The total cost for these interest rate collars was $15.3 million, which we have elected to defer and will settle through monthly straight-line cash payments to the counterparties over the term of the instruments. This hedging strategy enables us to limit the downside risk of significant reductions to interest rates over the term of the instruments in exchange for capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.

We designated these derivative instruments as cash flow hedges and determined that they are highly effective at achieving offsetting changes in cash flows attributable to interest rate fluctuations associated with our cash sweep program. The changes in fair value of the effective portion of these derivative instruments are initially recorded net of tax in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. These accumulated gains or losses are reclassified into “Revenue” (where the hedged transaction is recorded) on the condensed consolidated statements of comprehensive income (loss) when the hedged transaction affects earnings. We have elected to exclude the change in fair value of these derivative instruments attributable to the passage of time from the assessment of hedge effectiveness. Changes in the fair value of amounts excluded from the assessment of effectiveness are recorded net of tax in accumulated other comprehensive income (loss) and recognized as a reduction to “Revenue” on the condensed consolidated statements of comprehensive income (loss) using a straight-line amortization method over the term of the instruments.

Avantax, Inc. | Q2 2023 Form 10-Q 18

The table below presents the amount of gains and losses related to these derivative financial instruments and their location in the condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2023 and 2022 (in thousands):


	Gain (Loss) Recognized in OCI					Gain (Loss) Recognized in Income
Three Months Ended	June 30, 2023		June 30, 2022		Location of Gain (Loss) Recognized in Income	June 30, 2023		June 30, 2022
Interest rate collars, net of tax	$	(12,393)	$	—	Revenue	$	(332)	$	—

Six Months Ended
Interest rate collars, net of tax	$	(12,393)	$	—	Revenue	$	(332)	$	—

As of June 30, 2023, we estimate that $4.9 million of the deferred amounts recorded in accumulated other comprehensive income (loss) for our cash flow hedges will be reclassified into earnings within the next twelve months.

Gains and losses on our cash flow hedges are net of income tax benefit of $3.9 million for the three and six months ended June 30, 2023, respectively. Cash flows from these derivative instruments are included within operating activities in the condensed consolidated statements of cash flows, as our accounting policy is to present cash flows from hedging instruments in the same category as the item being hedged.

Economic Hedges of Interest Rate Risk

We also utilize interest rate cap derivatives to manage our economic exposure to interest rate movements which do not meet the hedge accounting requirements of ASC 815. During the second quarter of 2023, we sold two interest rate cap derivative contracts for a total notional value of $240.0 million. Each contract is indexed to daily simple SOFR, has a strike rate of 5.5%, and expires on May 31, 2026. These interest rate caps were sold for a total premium of $1.2 million, which have been deferred and will be settled by the counterparties through monthly straight-line cash payments over the term of the instruments. This hedging strategy enables us to offset a portion of the total cost of our interest rate collar derivatives by capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.

These derivative instruments are not designated for hedge accounting treatment, therefore, realized and unrealized gains or losses on the instruments are immediately recognized within “Interest expense and other, net” on the condensed consolidated statements of comprehensive income (loss). Cash flows from these derivative instruments are included within operating activities in the condensed consolidated statements of cash flows.


		Gain (Loss) Recognized in Income
Three Months Ended	Location of Gain (Loss) Recognized in Income	June 30, 2023		June 30, 2022
Interest rate caps	Interest expense and other, net	$	(842)	$	—

Six Months Ended
Interest rate caps	Interest expense and other, net	$	(842)	$	—

Avantax, Inc. | Q2 2023 Form 10-Q 19

Accumulated Other Comprehensive Income (Loss)

The table below presents a roll forward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and six months ended June 30, 2023 (in thousands):


	Interest Rate Collars		Deferred Taxes		Accumulated Other Comprehensive Income (Loss)
Balance as of December 31, 2022	$	—	$	—	$	—

Balance as of March 31, 2023	—		—		—
Changes in fair value	(16,377)		3,984		(12,393)
Reclassification to earnings	439		(107)		332
Balance as of June 30, 2023	$	(15,938)	$	3,877	$	(12,061)

There was no derivative activity to report for the three and six months ended June 30, 2022.

Note 12: Stockholders' Equity

Capital Return Program

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

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

Stock Repurchase Authorization

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

For the three months ended June 30, 2023, we repurchased approximately 2.2 million shares of our common stock under the stock repurchase authorization for an aggregate purchase price of approximately $51.2 million. For the six months ended June 30, 2023, we repurchased approximately 3.2 million shares of our common stock under the stock repurchase authorization for an aggregate purchase price of approximately $76.0 million. The remaining authorized amount under the stock repurchase authorization as of June 30, 2023, was approximately $124.0 million.

For the three months ended June 30, 2022, we repurchased approximately 0.2 million shares of our common stock under our previous stock repurchase plan for an aggregate purchase price of approximately $4.5 million. For the six months ended June 30, 2022, we repurchased approximately 1.9 million shares of our common stock under our previous stock repurchase plan for an aggregate purchase price of approximately $35.0 million.

Between July 1, 2023 and August 4, 2023, we repurchased approximately 0.4 million shares of our common stock under the stock repurchase authorization for an aggregate purchase price of approximately $9.1 million. The remaining authorized amount under the stock repurchase authorization as of August 4, 2023, was approximately $115.0 million.

Avantax, Inc. | Q2 2023 Form 10-Q 20

Note ~~10:~~13: Interest Expense and Other, Net

“Interest expense and other, net” on the condensed consolidated statements of ~~operations~~comprehensive income (loss) consisted of the following (in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Interest expense	Interest expense	$	7,265	$	7,302	$	14,395	$	14,485	Interest expense	$	4,661	$	57	$	6,192	$	81
Amortization of debt issuance costs	Amortization of debt issuance costs	399		377		788		740		Amortization of debt issuance costs	246		—		374		—
Amortization of debt discount	Amortization of debt discount	299		284		591		561		Amortization of debt discount	41		—		66		—
Total interest expense	Total interest expense	7,963		7,963		15,774		15,786		Total interest expense	4,948		57		6,632		81
Interest income and other	Interest income and other	154		61		184		121		Interest income and other	(49)		155		(1,024)		184
Transition services agreement income										Transition services agreement income	(1,043)		—		(2,646)		—
Derivative losses - interest rate caps										Derivative losses - interest rate caps	842		—		842		—

Interest expense and other, net	Interest expense and other, net	$	8,117	$	8,024	$	15,958	$	15,907	Interest expense and other, net	$	4,698	$	212	$	3,804	$	265

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

Note ~~11:~~14: Income Taxes

~~For 2022, our~~Our provision for income taxes in interim periods is based on our estimated annual effective tax rate. We record cumulative adjustments in the quarter in which a change in the estimated annual effective rate is determined. The estimated annual effective tax rate does not include the effects of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.

We recorded income tax expense of ~~$3.2~~$2.1 million and ~~$5.8~~$1.6 million for the three and six months ended June 30, ~~2022,~~2023, respectively. ~~We recorded income tax expense of $2.0 million and $3.7 million for the three and six months ended June 30, 2021, respectively.~~

Our effective income tax rate for the three and six months ended June 30, ~~2022~~2023 differed from the 21% statutory rate primarily due to non-deductible compensation and the effect of state taxes.

We recorded an income tax benefit of $4.1 million and $21.0 million for the three and six months ended June 30, ~~2021~~2022, respectively. Our effective tax rate for the three and six months ended June 30, 2022 differed from the 21% statutory rate primarily due to the release ofin our valuation ~~allowances~~allowance and the effect of state income taxes. We maintain a valuation allowance for federal net operating loss carryforwards that we have concluded it is more likely than not that the related deferred tax benefits will not be realized. This valuation allowance does not prevent us from utilizing unexpired net operating losses to offset taxable income in future periods. The majority of these net operating losses will either be utilized or expire between 2022 and 2024.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 17~~

Note ~~12:~~15: Net Income ~~(Loss)~~ Per Share

“Basic net income per share” is calculated using the weighted average number of common shares outstanding during the applicable period. “Diluted net income per share” is calculated using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the applicable period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and the vesting of outstanding ~~restricted stock units~~RSUs using the treasury stock method. Cash-settled restricted stock units are not settled in common shares and are therefore excluded from dilutive potential common shares. Dilutive potential common shares are excluded from the calculation of diluted net income per share if their effect is ~~antidilutive. Certain of our performance-based restricted stock units~~antidilutive, including when we report a loss from continuing operations. Performance-based RSUs are considered contingently issuable shares and are excluded from the diluted weighted average common shares outstanding computation ~~because~~if the related performance-based criteria ~~were~~are not expected to be achieved as of the end of the reporting period.

Avantax, Inc. | Q2 2023 Form 10-Q 21

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Numerator:	Numerator:									Numerator:
Income from continuing operations										Income from continuing operations	$	3,581	$	847	$	3,333	$	4,399
Income from discontinued operations										Income from discontinued operations	—		38,578		1,921		69,646
Net income	Net income	$	39,425	$	31,608	$	74,045	$	59,254	Net income	$	3,581	$	39,425	$	5,254	$	74,045
Denominator:	Denominator:									Denominator:
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	47,582		48,508		48,048		48,384		Basic weighted average common shares outstanding	38,349		47,582		41,497		48,048
Dilutive potential common shares (1)	Dilutive potential common shares (1)	1,108		877		1,172		857		Dilutive potential common shares (1)	852		1,108		1,018		1,172
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	48,690		49,385		49,220		49,241		Diluted weighted average common shares outstanding	39,201		48,690		42,515		49,220
Net income per share:
Basic		$	0.83	$	0.65	$	1.54	$	1.22
Diluted		$	0.81	$	0.64	$	1.50	$	1.20
Basic net income per share:										Basic net income per share:
Continuing operations										Continuing operations	$	0.09	$	0.02	$	0.08	$	0.09
Discontinued operations										Discontinued operations	—		0.81		0.05		1.45
Basic net income per share:										Basic net income per share:	$	0.09	$	0.83	$	0.13	$	1.54
Diluted net income per share:										Diluted net income per share:
Continuing operations										Continuing operations	$	0.09	$	0.02	$	0.08	$	0.09
Discontinued operations										Discontinued operations	—		0.79		0.04		1.41
Diluted net income per share:										Diluted net income per share:	$	0.09	$	0.81	$	0.12	$	1.50
Shares excluded (1)	Shares excluded (1)	960		1,248		935		1,269		Shares excluded (1)	510		960		427		935

________________________

(1)Potential common shares were excluded from the calculation of diluted net income per share for these periods because their effect would have been anti-dilutive.

Note ~~13:~~16: Subsequent ~~Event~~Events

OnBetween July 1, 2023 and August ~~5, 2022, and as provided for within~~4, 2023, we repurchased approximately 0.4 million shares of our ~~Senior Secured Credit Facility, we voluntarily prepaid $35.0 million of principal outstanding~~common stock under our ~~Term Loan. We also settled~~stock repurchase authorization for an aggregate purchase price of approximately $9.1 million. The remaining authorized amount under the ~~accrued and unpaid interest on the applicable principal outstanding up to, but not including, the date~~stock repurchase authorization as of ~~prepayment.~~

August 4, 2023, was approximately $115.0 million.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 1822

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

The following discussion provides an analysis of ~~the Company’s~~our financial condition, cash flows, and results of operations from management’s perspective and should be read in conjunction with our condensed consolidated financial statements and accompanying notes thereto included under Part I, Item 1 and the section titled “Cautionary Statement Regarding Forward-Looking Statements” in this Form 10-Q, as well as with our consolidated financial statements, accompanying notes thereto, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Overview

~~Blucora,~~Avantax, Inc. (the “Company,” ~~“Blucora,~~“Avantax,” “we,” “our,” or “us”), is a leading provider of integrated ~~tax-focused~~tax-intelligent wealth management services and ~~software,~~platforms, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting (“CPA”) firms. Our mission is to enable financial success by changing the way individuals and families plan and achieve their goals through ~~tax-advantaged~~tax-intelligent solutions. ~~We conduct our operations through two primary businesses: (1) the Wealth Management business and (2) the Tax Software business.~~ Our common stock is listed on the NASDAQ Global Select Market under the symbol ~~“BCOR.~~“AVTA.”

~~Wealth Management~~

Our ~~Wealth Management business consists~~integrated tax-intelligent wealth management services consist of the operations of Avantax Wealth Management and Avantax Planning ~~Partners (collectively, the~~ ~~“Wealth Management business”~~ ~~or the~~ ~~“Wealth Management segment”~~).Partners.

Avantax Wealth Management provides ~~tax-focused~~tax-intelligent wealth management solutions for financial professionals, tax professionals, CPA firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, which is a leading U.S. tax-focused independent broker-dealer, registered investment advisor (“RIA”), and insurance agency ~~subsidiaries and is a leading U.S. tax-focused independent broker-dealer.~~subsidiaries. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer ~~tax-advantaged~~tax-intelligent planning, investing, and wealth management services to their clients.

Divestiture of Tax Software Business

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

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

Recent Developments

Interest Rate Hedges

During the second quarter of 2023, we entered into two interest rate collar derivative contracts for a total notional value of $1.5 billion. Each contract is indexed to daily simple secured overnight financing rates (“~~HKFS”). We acquired HKFS in July 2020 (the~~ ~~“HKFS Acquisition”~~SOFR”) and ~~subsequently rebranded it in order~~is a combination of a purchased floor instrument with a strike rate of 2.5% and a sold cap instrument with a strike rate of 5.5%, both of which expire on May 31, 2026. The total cost for these interest rate collars was $15.3 million, which we have elected to ~~create tighter brand alignment~~defer and will settle through ~~one common and recognizable brand. Any reference~~monthly straight-line cash payments to ~~Avantax Planning Partners in this Form 10-Q is inclusive of HKFS.~~

~~Tax Software~~

~~Our Tax Software business consists~~the counterparties over the term of the ~~operations of TaxAct, Inc. (“TaxAct,”~~instruments. This hedging strategy enables us to limit the ~~“Tax Software business,”~~ ~~or the~~ ~~“Tax Software segment”) and provides digital tax preparation services and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com and its mobile applications.~~

~~Macroeconomic Environment~~

Our Wealth Management business is directly and indirectly affected by macroeconomic conditions and the state of global financial markets. Recent geopolitical uncertainty resulting, in part, from Russia’s continued invasion of Ukraine and the measures taken in response, including government sanctions, as well as rising inflation have contributed to significant volatility and decline in global financial markets during the first half of 2022. In response to inflationary pressures, the Federal Reserve implemented three interest rate increases during the first half of 2022, including a 75 basis point increase during its June 2022 meeting, the largest individual increase since 1994. As of June 30, 2022, the target range for the federal funds rate was between 1.5% and 1.75%, however the Federal Reserve has signaled that it expects additional rate increases during the second half of 2022 to increase this range to 3% or more by the end of 2022. These factors have all led to an increaseddownside risk of ~~economic recession and the potential for continued volatility and decline in global financial markets.~~

Volatility and decline in global financial markets and its impact on client asset values and transaction activity have negatively impacted Wealth Management revenues during the three and six months ended June 30, 2022.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 1923

~~This negative impact has been partially offset by incremental~~significant reductions to interest rates over the term of the instruments in exchange for capping the amount of our future cash flows that may be received from our cash sweep ~~revenue generated from an increasing~~program for the comparable notional amount hedged. We designated these derivative instruments as cash flow hedges and determined that they are highly effective at achieving offsetting changes in cash flows attributable to interest rate ~~environment. Based~~fluctuations associated with our cash sweep program. The changes in fair value of these derivative instruments are initially recorded net of tax in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. These accumulated gains or losses are reclassified into “Revenue” (where the hedged transaction is recorded) on the ~~target range for~~condensed consolidated statements of comprehensive income (loss) when the federal funds rate, the signaling by the Federal Reserve for additional rate increases during 2022, and current client asset values, we expect incremental cash sweep revenue should more than offset the negative impact that financial market volatility may have on Wealth Management revenues and operating income for the year ended December 31, 2022. However, if further financial market volatility results in continued decline in client asset values or if the Federal Reserve does not increase, or decreases, the federal funds rate, Wealth Management revenues and operating income would be negatively impacted.

~~COVID-19 Pandemic~~hedged transaction affects earnings.

In our Tax Software segment, the typical seasonality of our Tax Software business has been affected by changes to tax filing deadlines resulting from the COVID-19 pandemic. The Internal Revenue Service (“IRS”) delayed the start of the tax year 2020 tax season and extended the filing and payment deadline for tax year 2020 federal tax returns from April 15, 2021 to May 17, 2021. In addition, the IRS extended the federal filing and payment deadline for Texas, Louisiana, and Oklahoma to June 15, 2021. Beyond federal filings, the majority of states also extended their filing and payment deadlines for tax year 2020 state tax returns. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be earned in the first quarter toduring the second quarter of ~~2021.~~2023, we sold two interest rate cap derivative contracts for a total notional value of $240.0 million. Each contract is indexed to daily simple SOFR, has a strike rate of 5.5%, and expires on May 31, 2026. These interest rate caps were sold for a total premium of $1.2 million, which have been deferred and will be settled by the counterparties through monthly straight-line cash payments over the term of the instruments. This ~~change in seasonality caused significant fluctuations in our quarterly financial results and has affected~~hedging strategy enables us to offset a portion of the ~~comparability~~total cost of our ~~financial results. As a result,~~interest rate collar derivatives by capping the ~~results~~amount of ~~operations~~our future cash flows that may be received from our cash sweep program for the ~~Tax Software segment~~comparable notional amount hedged. These derivative instruments are not ~~as comparable~~designated for ~~the three~~hedge accounting treatment, therefore, realized and ~~six months ended June 30, 2022 and 2021 as they would have been in previous years.~~

~~For additional information~~unrealized gains or losses on the ~~effects~~instruments are immediately recognized within “Interest expense and other, net” on the condensed consolidated statements of ~~the COVID-19 pandemic on our results of operations for the selected periods, see “Results of Operations~~” below. For more information related to the COVID-19 pandemic and its impact to our businesses, see Part I, Item 1A and Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

comprehensive income (loss).

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 2024

RESULTS OF OPERATIONS

Summary
($ in thousands) Three Months Ended June 30, Change Six Months Ended
June 30, Change
2022 2021 $ % 2022 2021 $ %
Revenue:
Wealth Management $ 162,669 $ 162,395 $ 274 0.2 % $ 329,072 $ 316,886 $ 12,186 3.8 %
Tax Software 94,214 91,917 2,297 2.5 % 235,364 215,809 19,555 9.1 %
Total revenue 256,883 254,312 2,571 1.0 % 564,436 532,695 31,741 6.0 %
Operating income (loss):
Wealth Management 15,873 21,396 (5,523) (25.8) % 32,294 40,792 (8,498) (20.8) %
Tax Software 53,859 63,448 (9,589) (15.1) % 111,889 114,336 (2,447) (2.1) %
Corporate-level activity (18,947) (43,218) 24,271 56.2 % (48,355) (76,273) 27,918 36.6 %
Total operating income 50,785 41,626 9,159 22.0 % 95,828 78,855 16,973 21.5 %
Interest expense and other, net (8,117) (8,024) (93) (1.2) % (15,958) (15,907) (51) (0.3) %
Income before income taxes 42,668 33,602 9,066 27.0 % 79,870 62,948 16,922 26.9 %
Income tax expense (3,243) (1,994) (1,249) (62.6) % (5,825) (3,694) (2,131) (57.7) %
Net income $ 39,425 $ 31,608 $ 7,817 24.7 % $ 74,045 $ 59,254 14,791 25.0 %


($ in thousands)	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2023		2022		$		%		2023		2022		$		%
Revenue	$	186,928	$	162,669	$	24,259	14.9	%	$	364,908	$	329,072	$	35,836	10.9	%
Operating expenses:
Cost of revenue	110,847		114,446		(3,599)		(3.1)	%	219,099		235,634		(16,535)		(7.0)	%
Engineering and technology	2,191		2,302		(111)		(4.8)	%	4,912		4,116		796		19.3	%
Sales and marketing	27,423		24,882		2,541		10.2	%	53,604		47,056		6,548		13.9	%
General and administrative	26,335		21,721		4,614		21.2	%	58,736		45,596		13,140		28.8	%
Acquisition and integration	(39)		(6,792)		6,753		99.4	%	83		(5,126)		5,209		101.6	%
Depreciation	3,588		2,642		946		35.8	%	7,176		5,085		2,091		41.1	%
Amortization of acquired intangible assets	6,231		6,462		(231)		(3.6)	%	12,569		13,093		(524)		(4.0)	%
Total operating expenses	176,576		165,663		10,913		6.6	%	356,179		345,454		10,725		3.1	%
Operating income (loss) from continuing operations	10,352		(2,994)		13,346		445.8	%	8,729		(16,382)		25,111		153.3	%
Interest expense and other, net	(4,698)		(212)		(4,486)		(2116.0)	%	(3,804)		(265)		(3,539)		(1335.5)	%
Income (loss) from continuing operations before income taxes	5,654		(3,206)		8,860		276.4	%	4,925		(16,647)		21,572		129.6	%
Income tax benefit (expense)	(2,073)		4,053		(6,126)		(151.1)	%	(1,592)		21,046		(22,638)		(107.6)	%
Income from continuing operations	3,581		847		2,734		322.8	%	3,333		4,399		(1,066)		(24.2)	%
Discontinued operations
Income from discontinued operations before gain on disposal and income taxes	—		45,874		(45,874)		(100.0)	%	—		96,517		(96,517)		(100.0)	%
Pre-tax gain on disposal	—		—		—		N/A		2,539		—		2,539		N/A
Income from discontinued operations before income taxes	—		45,874		(45,874)		(100.0)	%	2,539		96,517		(93,978)		(97.4)	%
Income tax benefit (expense)	—		(7,296)		7,296		100.0	%	(618)		(26,871)		26,253		97.7	%
Income from discontinued operations	—		38,578		(38,578)		(100.0)	%	1,921		69,646		(67,725)		(97.2)	%
Net income	$	3,581	$	39,425	$	(35,844)	(90.9)	%	$	5,254	$	74,045	$	(68,791)	(92.9)	%

For the three months ended June 30, ~~2022,~~2023, compared to the three months ended June 30, ~~2021,~~2022, net income ~~increased $7.8~~decreased $35.8 million primarily due to the following factors:

•~~Wealth Management segment operating income decreased $5.5 million primarily due to revenue headwinds caused by market volatility, coupled with~~Income from continuing operations increased ~~personnel costs to drive strategic investment growth through enhanced sales and service capabilities that support our financial professionals.~~

•Tax Software segment operating income decreased $9.6 million primarily due to increased investments in seasonal customer care support and tax experts and an increase in strategic advertising and marketing spend.

•~~Expenses within corporate-level activity decreased $24.3 million primarily due to reduced acquisition and integration costs.~~

•The Company recorded income tax expense of $3.2 million, an effective tax rate of 7.6%, for the three months ended June 30, 2022, compared to income tax expense of $2.0 million, an effective tax rate of 5.9%, for the three months ended June 30, 2021.

~~For the six months ended June 30, 2022, compared to the six months ended June 30, 2021, net income increased $14.8~~$2.7 million primarily due to the following factors:

•~~Wealth Management segment operating income decreased $8.5~~Revenue increased $24.3 million primarily due to ~~revenue headwinds caused by market volatility, higher payout ratios to financial professionals, and incremental personnel costs.~~

•~~Tax Software segment operating income decreased $2.4 million primarily due to the increase in customer care support costs and strategic advertising and marketing spend discussed above.~~

•~~Expenses within corporate-level activity decreased $27.9 million primarily due to reduced acquisition and integration costs.~~

•The Company recorded income tax expense of $5.8 million, an effective tax rate of 7.3%, for the six months ended June 30, 2022, compared to income tax expense of $3.7 million, an effective tax rate of 5.9%, for the six months ended June 30, 2021.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 21~~

~~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 United States (“GAAP”~~) and include certain reconciling items attributable to our segments. We have two reportable segments: (1) the Wealth Management segment and (2) the Tax Software segment. Segment information 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, acquisition and integration costs, depreciation, amortization of acquired intangible assets, or contested proxy and other legal and consulting costs to the reportable segments. Such amounts are reflected under the heading “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, or income taxes to the reportable segments.

~~Wealth Management~~
($ in thousands) Three Months Ended June 30, Change Six Months Ended
June 30, Change
2022 2021 $ % 2022 2021 $ %
Revenue $ 162,669 $ 162,395 $ 274 0.2 % $ 329,072 $ 316,886 $ 12,186 3.8 %
Operating income $ 15,873 $ 21,396 $ (5,523) (25.8) % $ 32,294 $ 40,792 $ (8,498) (20.8) %
Segment margin 9.8 % 13.2 % 9.8 % 12.9 %

~~For the three months ended June 30, 2022, compared to the three months ended June 30, 2021, Wealth Management segment operating income decreased $5.5 million primarily due to the following factors:~~

•Wealth Management revenue increased $0.3 million primarily due to increases of $7.6 million and $1.4 million in advisory and asset-based revenues, respectively. These increases were partially offset by an $8.9 million decrease in commission revenue. The significant financial market volatility and decline discussed in the ~~Macroeconomic Environment~~ section above was the primary driver of revenue headwinds during the period. The impact of this volatility on our advisory revenue was not fully realized during the period due to the timing of market movements relative to when clients are billed. These revenue headwinds were partially offset by incremental cash sweep revenue generated from increases in the federal funds ~~rate.~~rate paired with the program’s structure that increases returns in a higher interest rate environment. This incremental revenue was partially offset by lower advisory revenue due to timing of market changes and asset growth relative to when clients were billed each period, and lower commission revenue due to reduced transaction activity.

•~~Wealth Management~~Total operating expenses increased ~~$5.8~~$10.9 million primarily from an increase in general and administrative expense for executive transition and reorganization related costs associated with the TaxAct Sale, and higher personnel costs within sales and marketing expense. These increases were partially offset by lower financial professional commissions within cost of revenue caused by reduced advisory and commission revenues and prior period acquisition-related contingent consideration fair value adjustments that did not reoccur in the current period.

•Income tax benefit decreased $6.1 million, primarily due to ~~$5.2 million~~a reduction in our valuation allowance during the prior year associated with the utilization of ~~incremental personnel costs. Increased personnel costs reflect our strategic investments to drive growth through enhanced sales and service capabilities that support our financial professionals.~~net operating losses against prior period taxable income.

•~~Segment margin compression for~~Income from discontinued operations decreased $45.9 million primarily due to the ~~three months ended June 30, 2022, was primarily a result~~completion of the market volatility discussed above, coupled with an increase in our fixed operating expenses. For the remainder of the year, we expect to incur incremental travel and conference costs associated with reduced COVID-19 travel restrictions; however, we expect for segment margin to increase due to increasesTaxAct Sale in the ~~federal funds rate.~~prior period.

Avantax, Inc. | Q2 2023 Form 10-Q 25

For the six months ended June 30, ~~2022,~~2023, compared to the six months ended June 30, ~~2021, Wealth Management segment operating~~2022, net income decreased ~~$8.5~~$68.8 million primarily due to the following factors:

•~~Wealth Management revenue increased $12.2~~Income from continuing operations decreased $1.1 million primarily due to ~~increases of $23.7~~the following factors:

•Revenue increased $35.8 million ~~and $1.8 million in advisory and asset-based revenues, respectively,~~primarily due to incremental cash sweep revenue, partially offset by ~~a $13.7 million decrease~~lower advisory and commission revenues discussed in ~~commission revenue. The increase in advisory revenue was primarily from increased client asset levels and~~ the ~~timing of market movements relative to when clients are billed. Commission revenue was negatively impacted by unfavorable transaction activity and volatility in global financial markets, as discussed~~section above.

•~~Wealth Management~~Total operating expenses increased ~~$20.7~~$10.7 million primarily from the incremental costs discussed in the section above, partially offset by lower financial professional commissions caused by reduced advisory and commission revenues.

•Income tax benefit decreased $22.6 million, primarily due to a ~~$10.8 million increase~~reduction in cost of revenue resulting from increased advisory fees and commissions paid, coupled with $8.9 million of incremental personnel costs. Higher payout ratios reflect an expansion in the number of financial professionals concentrated at higher payout levels, due in part to improved market performanceour valuation allowance during the ~~second half~~prior year associated with the utilization of 2021, and greater retention and recruitment of higher producing financial professionals. Increased personnel costs reflect our strategic investments to drive growth through enhanced sales and service capabilities that support our financial professionals.net operating losses against prior period taxable income.

•~~Refer~~Income from discontinued operations decreased $96.5 million primarily due to the ~~discussion above for~~completion of the ~~three~~TaxAct Sale in the prior period. During the six months ended June 30, ~~2022, for further information regarding segment margin compression and~~2023 we recognized an incremental pre-tax gain on disposal of $2.5 million in connection with the finalization of our ~~expectations for the remainder of the year.~~closing working capital balance.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 22~~

Sources of Revenue

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


($ in thousands)	($ in thousands)			Three Months Ended June 30,						Change		Six Months Ended June 30,				Change			($ in thousands)			Three Months Ended June 30,				Change						Six Months Ended June 30,				Change
		Sources of Revenue	Primary Drivers	2022			2021			$			2022			2021				$				Sources of Revenue	Primary Drivers	2023			2022			$		%		2023			2022			$		%
Financial professional-driven	Financial professional-driven	Advisory	- Advisory asset levels	$	104,155		$	96,508		$	7,647		$	211,324		$	187,627			$	23,697		Financial professional-driven	Advisory	- Advisory asset levels	$	103,316		$	104,155		$	(839)	(0.8)	%	$	200,841		$	211,324		$	(10,483)	(5.0)	%
		Commission	- Transactions - Asset levels - Product mix	42,835			51,702			(8,867)			90,490			104,236				(13,746)				Commission	- Transactions - Asset levels - Product mix	41,839			42,835			(996)		(2.3)	%	83,311			90,490			(7,179)		(7.9)	%
Other revenue	Other revenue	Asset-based	- Cash balances - Interest rates - Number of accounts - Client asset levels	6,964			5,526			1,438			12,627			10,855				1,772			Other revenue	Asset-based	- Cash balances - Interest rates - Number of accounts - Client asset levels	33,193			6,964			26,229		376.6	%	67,080			12,627			54,453		431.2	%
		Transaction and fee	- Account activity - Number of financial professionals - Number of clients - Number of accounts	8,715			8,659			56			14,631			14,168				463				Transaction and fee	- Account activity - Number of financial professionals - Number of clients - Number of accounts	8,580			8,715			(135)		(1.5)	%	13,676			14,631			(955)		(6.5)	%
		Total revenue		$	162,669		$	162,395		$	274		$	329,072		$	316,886			$	12,186			Total revenue		$	186,928		$	162,669		$	24,259	14.9	%	$	364,908		$	329,072		$	35,836	10.9	%
		Total recurring revenue		$	141,935		$	138,900		$	3,035		$	285,672		$	269,655			$	16,017			Total recurring revenue		$	166,531		$	141,935		$	24,596	17.3	%	$	324,159		$	285,672		$	38,487	13.5	%
		Recurring revenue rate		87.3		%	85.5		%				86.8		%	85.1		%						Recurring revenue rate		89.1		%	87.3		%					88.8		%	86.8		%

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

Avantax, Inc. | Q2 2023 Form 10-Q 26

Business Metrics


($ in thousands)	($ in thousands)	June 30,						Change				($ in thousands)	June 30,						Change
		2022			2021			$		%			2023			2022			$		%
Client assets balances:	Client assets balances:											Client assets balances:
Total client assets ~~(1)~~	Total client assets ~~(1)~~	$	76,522,066		$	87,814,790		$	(11,292,724)	(12.9)	%	Total client assets ~~(1)~~	$	83,827,113		$	76,522,066		$	7,305,047	9.5	%
Brokerage assets ~~(1)~~	Brokerage assets ~~(1)~~	$	39,776,018		$	48,373,805		$	(8,597,787)	(17.8)	%	Brokerage assets ~~(1)~~	$	41,177,502		$	39,776,018		$	1,401,484	3.5	%
Advisory assets ~~(1)~~	Advisory assets ~~(1)~~	$	36,746,048		$	39,440,985		$	(2,694,937)	(6.8)	%	Advisory assets ~~(1)~~	$	42,649,611		$	36,746,048		$	5,903,563	16.1	%
Advisory assets as a percentage of total client assets	Advisory assets as a percentage of total client assets	48.0		%	44.9		%					Advisory assets as a percentage of total client assets	50.9		%	48.0		%

Number of financial professionals (in ones):	Number of financial professionals (in ones):											Number of financial professionals (in ones):
Independent financial professionals ~~(2)~~(1)	Independent financial professionals ~~(2)~~(1)	3,315			3,579			(264)		(7.4)	%	Independent financial professionals ~~(2)~~(1)	3,078			3,315			(237)		(7.1)	%
In-house/employee financial professionals ~~(3)~~(2)	In-house/employee financial professionals ~~(3)~~(2)	34			27			7		25.9	%	In-house/employee financial professionals ~~(3)~~(2)	38			34			4		11.8	%
Total number of financial professionals	Total number of financial professionals	3,349			3,606			(257)		(7.1)	%	Total number of financial professionals	3,116			3,349			(233)		(7.0)	%

Advisory and commission revenue per financial professional ~~(4)~~(3)	Advisory and commission revenue per financial professional ~~(4)~~(3)	$	43.9		$	41.1		$	2.8	6.8	%	Advisory and commission revenue per financial professional ~~(4)~~(3)	$	46.6		$	43.9		$	2.7	6.2	%

___________________________

(1)In connection with our ongoing integration of acquisitions, we refined the methodology by which we calculate client assets to align the methodologies within our Wealth Management segment for calculating such metrics. Specifically, such changes to the methodology include alignment to one third party data aggregator for assets not placed in custody with our clearing firm and to one consistent set of logic for all assets and transaction types. We have not recast client assets for prior periods to conform to our current presentation as we believe the changes to the calculation to be immaterial.

~~(2)~~The number of independent financial professionals includes licensed financial professionals that work with Avantax Wealth Management and operate as independent contractors, as well as 179 licensed referring representatives at CPA firms ~~(approximately 162)~~ that partner with Avantax Planning Partners.

~~(3)~~(2)The number of in-house/employee financial professionals includes licensed financial planning consultants, all of which are affiliated with Avantax Planning Partners.

~~(4)~~(3)Calculation based on advisory and commission revenue for the three months ended June 30, 2023 and 2022, ~~and 2021,~~ respectively.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 23~~

Client Assets. Historically we have calculated total client assets to include 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. Beginning in the second quarter of 2022, the calculation of total client assets also includes assets for which financial professionals licensed with Avantax provide administrative services to clients. Because we did not have relationships with financial professionals that had clients for whom we did not provide administrative services prior to the second quarter of 2022, our calculation of total client assets for any prior period would not have changed under our current calculation. To the extent that we or they provide more than one service for a client’s assets, the value of the asset is only counted once in the total amount of total client assets. Total client assets include advisory assets, non-advisory brokerage accounts, annuities, and mutual fund positions held directly with fund companies. These assets are not reported on the Company’s ~~condensed~~ consolidated balance sheets.

Advisory assets include client assets for which we provide investment advisory and management services 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 advisory assets for each advisory client. ~~These assets are not reported on the Company’s condensed consolidated balance sheets.~~

Brokerage assets represent total client assets other than advisory assets.

Total client assets ~~decreased $11.3~~increased $7.3 billion as of June 30, ~~2022~~2023 compared to June 30, ~~2021~~2022, primarily due to ~~$10.7~~$6.5 billion of ~~unfavorable~~favorable market changes and ~~reinvestment levels, and~~ net client ~~outflows~~inflows.

Advisory assets increased $5.9 billion as of ~~$0.6 billion. The $0.6 billion of net client outflows included net client inflows of approximately $0.4 billion during the six months ended~~ June 30, ~~2022.~~

~~Advisory~~2023 compared to June 30, 2022, and advisory assets as a percentage of total client assets increased to 50.9% as of June 30, 2023, compared to 48.0% as of June 30, ~~2022, compared to 44.9% as~~2022. The increase in advisory assets was primarily caused by $3.1 billion of ~~June 30, 2021, primarily driven by~~favorable market changes and net new advisory assets of ~~$3.1 billion. Net new~~$2.8 billion, both of which contributed to the increase in advisory assets ~~benefited from organic growth and the conversion~~as a percentage of ~~off platform, direct to fund assets, when appropriate for the~~total client ~~to fee-based advisory platforms that include ongoing management and which generate higher margins.~~assets.

Financial Professionals. The number of our financial professionals decreased ~~7.1%~~7.0% as of June 30, ~~2022~~2023 compared to June 30, ~~2021,~~2022, with the decrease primarily due to attrition related to lower revenue-producing financial professionals. Included within this attrition of lower revenue-producing financial professionals were terminations primarily in the fourth quarter of 2022 associated with certain financial professional’s failure to comply with a policy implemented to ensure regulatory compliance with certain record keeping and supervisory requirements. Advisory and commission revenue per financial professional increased ~~6.8%~~6.2% for the same period, primarily due to the ~~retention~~attrition of ~~higher~~lower revenue-producing financial ~~professionals.~~professionals discussed above. The decrease in the number of financial

Avantax, Inc. | Q2 2023 Form 10-Q 27

professionals was partially offset by our continued recruitment and onboarding of independent financial professionals.

Advisory Revenue. Advisory revenue primarily includes fees charged to clients in advisory accounts for which we are the RIA. These fees are based on the value of assets within these advisory accounts. For advisory revenues generated by Avantax Wealth Management, advisory fees are typically billed quarterly, in advance, and the related advisory revenues are deferred and recognized ratably over the period in which our performance obligations have been completed. For advisory revenue generated by Avantax Planning Partners, advisory fees are typically billed quarterly, in arrears, and the related advisory revenues are accrued and recognized ratably over the period in which our performance obligations were completed. Because advisory fees are based on advisory assets on the last day of each quarter, our revenues are impacted, in part, by the timing of market movements relative to when clients are billed.

Advisory asset balances were as follows (in thousands):

June 30, Change
2022 2021 $ %
Advisory assets—independent financial professionals $ 31,073,772 $ 33,950,724 $ (2,876,952) (8.5) %
Advisory assets—in-house/employee financial professionals 4,424,316 4,125,742 298,574 7.2 %
Retirement advisory assets—in-house/employee financial professionals 1,247,960 1,364,519 (116,559) (8.5) %
Total advisory assets $ 36,746,048 $ 39,440,985 $ (2,694,937) (6.8) %

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 24~~


	June 30,				Change
	2023		2022		$		%
Advisory assets—independent financial professionals	$	35,027,059	$	31,073,772	$	3,953,287	12.7	%
Advisory assets—in-house/employee financial professionals	6,134,084		4,424,316		1,709,768		38.6	%
Retirement advisory assets—in-house/employee financial professionals	1,488,468		1,247,960		240,508		19.3	%
Total advisory assets	$	42,649,611	$	36,746,048	$	5,903,563	16.1	%

The activity within our advisory assets was as follows (in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Balance, beginning of the period	Balance, beginning of the period	$	40,921,292	$	36,774,871	$	42,179,051	$	35,603,557	Balance, beginning of the period	$	40,580,893	$	40,921,292	$	38,282,333	$	42,179,051
Net new advisory assets	Net new advisory assets	580,957		863,564		1,747,630		1,232,427		Net new advisory assets	761,893		580,957		1,667,621		1,747,630

Market impact and other	Market impact and other	(4,756,201)		1,802,550		(7,180,633)		2,605,001		Market impact and other	1,306,825		(4,756,201)		2,699,657		(7,180,633)
Balance, end of the period	Balance, end of the period	$	36,746,048	$	39,440,985	$	36,746,048	$	39,440,985	Balance, end of the period	$	42,649,611	$	36,746,048	$	42,649,611	$	36,746,048
Advisory revenue	Advisory revenue	$	104,155	$	96,508	$	211,324	$	187,627	Advisory revenue	$	103,316	$	104,155	$	200,841	$	211,324
Average advisory fee rate (1)	Average advisory fee rate (1)	26 bps		26 bps		51 bps		52 bps		Average advisory fee rate (1)	26 bps		26 bps		51 bps		51 bps

_________________________

(1)For the three months ended June 30, ~~2022~~2023 and June 30, ~~2021,~~2022, average advisory fee rate equals advisory revenue for the relevant quarterly period divided by the advisory asset balance at the beginning of the relevant quarterly period. For the six months ended June 30, ~~2022~~2023 and June 30, ~~2021,~~2022, average advisory fee rate equals the sum of each quarterly average advisory fee rate within the relevant year-to-date period.

Compared to June 30, ~~2021,~~2022, advisory assets ~~decreased $2.7~~increased $5.9 billion, which included an increase of $2.1 billion and $4.4 billion during the three and six months ended June 30, 2023, respectively. These increases were driven by ~~a decrease of $5.8 billion from unfavorable~~favorable market changes and ~~reinvestment levels, partially offset by a $3.1 billion increase in~~ net new advisory ~~assets. Net new advisory~~ assets ~~benefited~~ from organic growth and the ~~conversion~~recruitment of ~~off platform, direct to fund assets, when appropriate for the client, to fee-based advisory platforms that include ongoing management and which generate higher margins.~~ new assets.

Although ending advisory assets ~~declined, due to the timing of market declines relative to when clients are billed,~~increased, advisory revenue ~~increased $7.6~~declined $0.8 million and ~~$23.7~~$10.5 million for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, ~~2021,~~2022, respectively. ~~The average advisory fee rates between~~These declines were a result of the ~~two periods~~timing of market changes and asset growth relative to when clients were ~~relatively flat.~~

For the three and six months ended June 30, 2022, advisory assets declined $4.2 billion and $5.4 billion, respectively, primarily due to the decline in global markets discussed in the sections above.billed each period.

Commission Revenue. ~~The Wealth Management segment generates~~Wegenerate two types of commissions: (1) transaction-based commissions and (2) trailing commissions. Transaction-based commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial professionals. The level of transaction-based commissions can vary from period-to-period based on the overall economic environment, number of trading days in the reporting period, market volatility, interest rate fluctuations, and investment activity of our financial professionals’ clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on certain 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.

Avantax, Inc. | Q2 2023 Form 10-Q 28

Our commission revenue, by product category and by type of commission revenue, was as follows (in thousands):


		Three Months Ended June 30,				Change				Six Months Ended June 30,				Change					Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
		2022		2021		$		%		2022		2021		$		%			2023		2022		$		%		2023		2022		$		%
By product category:	By product category:																	By product category:
Mutual funds	Mutual funds	$	17,790	$	23,857	$	(6,067)	(25.4)	%	$	37,173	$	47,551	$	(10,378)	(21.8)	%	Mutual funds	$	15,798	$	17,790	$	(1,992)	(11.2)	%	$	31,290	$	37,173	$	(5,883)	(15.8)	%
Variable annuities	Variable annuities	15,772		18,473		(2,701)		(14.6)	%	32,069		36,495		(4,426)		(12.1)	%	Variable annuities	15,101		15,772		(671)		(4.3)	%	29,665		32,069		(2,404)		(7.5)	%
Insurance	Insurance	4,235		4,005		230		5.7	%	7,959		9,630		(1,671)		(17.4)	%	Insurance	6,697		4,235		2,462		58.1	%	13,288		7,959		5,329		67.0	%
General securities	General securities	5,038		5,367		(329)		(6.1)	%	13,289		10,560		2,729		25.8	%	General securities	4,243		5,038		(795)		(15.8)	%	9,068		13,289		(4,221)		(31.8)	%

Total commission revenue	Total commission revenue	$	42,835	$	51,702	$	(8,867)	(17.2)	%	$	90,490	$	104,236	$	(13,746)	(13.2)	%	Total commission revenue	$	41,839	$	42,835	$	(996)	(2.3)	%	$	83,311	$	90,490	$	(7,179)	(7.9)	%

By type of commission:	By type of commission:																	By type of commission:
Transaction-based	Transaction-based	$	17,881	$	21,076	$	(3,195)	(15.2)	%	$	38,505	$	43,443	$	(4,938)	(11.4)	%	Transaction-based	$	18,084	$	17,881	$	203	1.1	%	$	36,885	$	38,505	$	(1,620)	(4.2)	%
Trailing	Trailing	24,954		30,626		(5,672)		(18.5)	%	51,985		60,793		(8,808)		(14.5)	%	Trailing	23,755		24,954		(1,199)		(4.8)	%	46,426		51,985		(5,559)		(10.7)	%
Total commission revenue	Total commission revenue	$	42,835	$	51,702	$	(8,867)	(17.2)	%	$	90,490	$	104,236	$	(13,746)	(13.2)	%	Total commission revenue	$	41,839	$	42,835	$	(996)	(2.3)	%	$	83,311	$	90,490	$	(7,179)	(7.9)	%

As discussed in the sections above, the declines in transaction-based and trailing commission revenues for the periods shown in the table above were primarily due to unfavorable transaction activity and volatility in global financial markets duringFor the three and six months ended June 30, ~~2022.~~

~~Blucora, Inc.~~ | Q22023, compared to the three and six months ended June 30, 2022, ~~Form 10-Q 25~~

commission revenue decreased $1.0 million and $7.2 million, respectively. These decreases were primarily due to declines in trailing and transaction-based commissions for mutual funds, general securities, and variable annuities. Volatility in equity markets and the impact to asset values has negatively impacted mutual funds and variable annuities trail commissions, while the current interest rate environment has led to considerable declines in transaction volume for alternate investment vehicles linked with real estate. We expect the continued growth of assets on our fee-based advisory platform to result in commission revenue headwinds in the future.

Asset-Based Revenue. Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, cash sweep programs, asset-based retirement plan service fees, and other asset-based revenues.

For the three ~~and six~~months ended June 30, 2023, compared to the three months ended June 30, 2022, ~~compared to the three and six months ended June 30, 2021,~~ asset-based revenue increased ~~$1.4~~$26.2 million, ~~and $1.8 million, respectively. These increases were~~ primarily due to ~~$2.3 million of~~ incremental cash sweep revenue ~~during the three and six months ended,~~of $26.0 million driven by increases in the federal funds ~~rate.~~rate, partially offset by declines in client cash sweep balances relative to prior year levels.

For the six months ended June 30, 2023, compared to the six months ended June 30, 2022, asset-based revenue increased $54.5 million, primarily due to incremental cash sweep revenue of $55.5 million driven by increases in the federal funds rate, partially offset by declines in client cash sweep balances relative to prior year levels. The increases in cash sweep revenue were partially offset by reduced fees from sponsorship programs. ~~Due~~

For the three and six months ended June 30, 2023, we recognized approximately $0.4 million of deferred premium charges for our interest rate collar derivatives which are included as a reduction to our cash sweep revenue. Under the ~~timing~~terms of our interest rate ~~increases and the non-linear nature~~collar derivative contracts, we expect to recognize approximately $5.1 million of ~~upside associated with these increases, and with expectation of additional rate increases by the Federal Reserve in the second half of 2022,~~deferred premium charges as a reduction to our cash sweep revenue ~~is expected~~over the next twelve months. For the remainder of the year, we expect for cash sweep revenue to continue to increase relative to comparable prior year periods driven by rate increases during 2023 and as the full benefits of rate increases during the latter half of 2022 are realized for a full annual period. Currently, the target range for the ~~remainder~~federal funds rate is below the cap of our interest rate collar derivatives. However, future increases to this range above our cap strike rate will limit our incremental cash sweep revenue on the ~~year.~~comparable notional portion of our interest rate collars derivatives.

Transaction and Fee Revenue. Transaction and fee revenue primarily includes support fees charged to financial professionals, fees charged for executing certain transactions in client accounts, and other fees related to services provided and other account charges as generally outlined in agreements with financial professionals, clients, financial institutions, and retirement plan sponsors.

For the three and six months ended June 30, ~~2022,~~2023, compared to the three and six months ended June 30, ~~2021,~~2022, transaction and fee revenue remained relatively flat.

~~Tax Software~~
($ in thousands) Three Months Ended June 30, Change Six Months Ended
June 30, Change
2022 2021 $ % 2022 2021 $ %
Revenue $ 94,214 $ 91,917 $ 2,297 2.5 % $ 235,364 $ 215,809 $ 19,555 9.1 %
Operating income $ 53,859 $ 63,448 $ (9,589) (15.1) % $ 111,889 $ 114,336 $ (2,447) (2.1) %
Segment margin 57.2 % 69.0 % 47.5 % 53.0 %

~~For the three months ended June 30, 2022, compared to the three months ended June 30, 2021, Tax Software operating income decreased $9.6 million due to the following factors:~~

•~~Tax Software revenue increased $2.3 million primarily due to an increase in consumer e-files associated with market share growth.~~

•Tax Software operating expenses increased $11.9 million primarily due to increased investments in seasonal customer care support and tax experts and an increase in strategic advertising and marketing spend. These incremental costs were the primary drivers of the reduction in segment margin shown in the table above.

~~For the six months ended June 30, 2022, compared to the six months ended June 30, 2021, Tax Software operating income decreased $2.4 million due to the following factors:~~

•Tax Software revenue increased $19.6 million due to a $16.9 million increase in consumer revenue and a $2.7 million increase in professional revenue. The growth in revenue during the six months ended June 30, 2022 was attributable to higher average revenue per unit and growth in market share from favorable customer retention and acquisition. These increases during the period were partially offset by an increase in the volume of customers that filed extensions when compared to the prior year. We expect to continue to benefit from higher average revenue per unit for the remainder of the year as customers complete returns associated with these extensions.

•Tax Software operating expenses increased $22.0 million primarily due to increased investments in seasonal customer care support and tax experts and an increase in strategic advertising and marketing spend. These incremental costs were the primary drivers of the reduction in segment margin shown in the table above.

~~Sources of Revenue~~

Tax Software revenue is derived primarily from the sale of tax preparation digital services, ancillary services, packaged tax preparation software, and multiple element arrangements that may include a combination of these items. Ancillary services primarily include refund payment transfer, audit defense, e-file concierge services, and Xpert Assist.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 2629

We classify Tax Software revenue into two different categories: consumer revenue and professional revenue. Consumer revenue is derived from products and services sold directly to customers primarily for the preparation of individual or business tax returns. Professional revenue represents Tax Software revenue derived from products sold to tax return preparers who utilize our offerings to service end-user customers.

~~Revenue by category was as follows (in thousands):~~
Three Months Ended June 30, Change Six Months Ended
June 30, Change
2022 2021 $ % 2022 2021 $ %
Consumer $ 91,027 $ 88,846 $ 2,181 2.5 % $ 216,288 $ 199,413 $ 16,875 8.5 %
Professional 3,187 3,071 116 3.8 % 19,076 16,396 2,680 16.3 %
Total Tax Software revenue $ 94,214 $ 91,917 $ 2,297 2.5 % $ 235,364 $ 215,809 $ 19,555 9.1 %

~~Business Metrics~~

We measure the performance of our Tax Software business using three sets of non-financial metrics, which we consider to be important indicators of the performance of our Tax Software business and are especially relevant through the end of a completed tax season. These non-financial metrics include key performance indicators for our total Tax Software business, in addition to the consumer and professional tax software portions of the Tax Software business:

•~~We measure our total tax software customers using the total number of accepted federal tax e-files completed by both our consumer tax software customers and our professional tax software customers.~~

•~~We measure our consumer tax software customers using the number of accepted federal tax e-files made through our software and digital services.~~

•We measure our professional tax software customers using three metrics: (1) the number of accepted federal tax e-files made through our software, (2) the number of units sold, and (3) the number of e-files per unit sold.

(In thousands, except as otherwise indicated) Six Months Ended June 30, Change
2022 2021 Units %
Total e-files (1)
5,528 5,397 131 2.4 %
Consumer:
Consumer e-files (1)
3,184 3,112 72 2.3 %
Professional:
Professional e-files 2,344 2,285 59 2.6 %
Units sold (in ones) 20,927 20,692 235 1.1 %
Professional e-files per unit sold (in ones) 112.0 110.4 1.6 1.4 %
~~____________________________~~

~~(1)~~We participate in the Free File Alliance that is part of an IRS partnership that provides free electronic tax filing services to taxpayers meeting certain income-based guidelines. Free File Alliance e-files are included within total e-files and consumer e-files above.

For the six months ended June 30, 2022, compared to the six months ended June 30, 2021, e-files across each category, and professional units sold, increased primarily due to growth in market share from favorable customer retention and acquisition, both of which benefited from our investments in strategic marketing spend and customer care support.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 27~~

~~Corporate-Level Activity~~

Certain corporate-level activity, including certain general and administrative costs (such as personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, and contested proxy and other legal and consulting costs, is not allocated to our reportable segments.

~~Corporate-level activity by category was as follows (in thousands):~~

Three Months Ended June 30, Change Six Months Ended
June 30, Change
2022 2021 $ % 2022 2021 $ %
Unallocated corporate-level general and administrative expenses $ 7,680 $ 6,259 $ 1,421 22.7 % $ 14,972 $ 11,953 $ 3,019 25.3 %
Stock-based compensation 5,198 5,160 38 0.7 % 11,423 10,770 653 6.1 %
Acquisition and integration (6,792) 18,169 (24,961) (137.4) % (5,126) 26,272 (31,398) (119.5) %
Depreciation 5,002 4,102 900 21.9 % 9,676 7,345 2,331 31.7 %
Amortization of acquired intangible assets 6,462 7,063 (601) (8.5) % 13,093 14,238 (1,145) (8.0) %
Contested proxy and other legal and consulting costs 1,397 2,465 (1,068) (43.3) % 4,317 5,695 (1,378) (24.2) %
Total corporate-level activity $ 18,947 $ 43,218 $ (24,271) (56.2) % $ 48,355 $ 76,273 $ (27,918) (36.6) %

~~For the three months ended June 30, 2022, compared to the three months ended June 30, 2021, corporate-level activity decreased $24.3 million primarily due to the following factors:~~

•Acquisition and integration expenses decreased $25.0 million, primarily due to an $18.5 million decrease in the fair value adjustments recorded for the HKFS Contingent Consideration liability between the two periods, and a $6.4 million decrease in professional services and other expenses due to a reduction in integration activities.

•~~Unallocated general and administrative expenses increased $1.4 million primarily due to incremental personnel costs.~~

~~For the six months ended June 30, 2022, compared to the six months ended June 30, 2021, corporate-level activity decreased $27.9 million primarily due to the following factors:~~

•Acquisition and integration expenses decreased $31.4 million, primarily due to a $23.1 million decrease in the fair value adjustments recorded for the HKFS Contingent Consideration liability between the two periods, and an $8.3 million decrease in professional services and other expenses due to a reduction in integration activities.

•~~Unallocated general and administrative expenses increased $3.0 million primarily due to incremental personnel costs.~~

•~~Depreciation expense increased $2.3 million primarily due to capitalized software costs for our Tax Software business.~~

Cost of Revenue
($ in thousands) Three Months Ended June 30, Change Six Months Ended
June 30, Change
2022 2021 $ % 2022 2021 $ %
Wealth Management $ 113,644 $ 113,910 $ (266) (0.2) % $ 233,518 $ 222,533 $ 10,985 4.9 %
Tax Software 6,873 4,429 2,444 55.2 % 16,299 10,007 6,292 62.9 %
Total cost of revenue $ 120,517 $ 118,339 $ 2,178 1.8 % $ 249,817 $ 232,540 $ 17,277 7.4 %
Percentage of revenue 46.9 % 46.5 % 44.3 % 43.7 %


($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2023			2022			$		%		2023			2022			$		%



Cost of revenue	$	110,847		$	114,446		$	(3,599)	(3.1)	%	$	219,099		$	235,634		$	(16,535)	(7.0)	%
Percentage of revenue	59.3		%	70.4		%					60.0		%	71.6		%

Cost of revenue ~~consists of costs related to our Wealth Management and Tax Software businesses, which include~~includes commissions and advisory fees paid to independent financial professionals, payments made to CPA firms under fee sharing arrangements, amortization of forgivable loans issued to our financial professionals, ~~third-party~~

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 28~~

~~costs,~~ and ~~costs associated with the technical support team and the operation of~~stock-based compensation for awards granted to our data centers. Data center costs include personnel expenses, the cost of temporary help and contractors, professional services fees, software support and maintenance, bandwidth and hosting costs, and depreciation (including depreciation related to software development costs in the Tax Software segment).financial professionals. Cost of revenue does not include compensation paid to in-house/employee financial ~~professionals in our Wealth Management business.~~professionals. The compensation of our in-house/employee financial professionals is reflected in “Sales and marketing” expense.

For the three months ended June 30, ~~2022,~~2023, compared to the three months ended June 30, ~~2021,~~2022, cost of revenue ~~increased $2.2~~decreased $3.6 million. Commissions to financial professionals declined $2.9 million primarily due to ~~increased Tax Software segment~~reductions in advisory and commissions revenue discussed above. The remaining change was primarily due to reduced personnel costs, ~~and depreciation of capitalized software development costs.~~partially offset by incremental financial professional forgivable loan amortization.

For the six months ended June 30, ~~2022,~~2023, compared to the six months ended June 30, ~~2021,~~2022, cost of revenue ~~increased $17.3~~decreased $16.5 million. Commissions to financial professionals declined $15.1 million primarily due to ~~an increase~~reductions in advisory ~~fees~~ and commissions ~~paid~~revenue caused by the volatility in global financial markets discussed above. The remaining change was primarily due to reduced personnel costs, partially offset by incremental financial ~~professionals associated with incremental Wealth Management revenues.~~ professional forgivable loan amortization.

Payout ratios to independent financial professionals ~~are determined based on~~declined approximately 1% for both comparable periods. These declines were primarily caused by equity market volatility during the trailing twelve-month ~~revenues and may not immediately correlate~~period, coupled with ~~changes~~continued growth in ~~client assets during periods~~our in-house/employee-based advisory model, which has lower payout rates as compared to our independent model. The decrease in cost of ~~significant market volatility. Payout ratios have increased due to an expansion in~~revenue as a percentage of revenue is reflective of the ~~number~~benefits of financial professionals concentrated at higher payout levels, due in part to improved market performance during the second half of 2021, greater retention and recruitment of higher producing financial professionals, and the alignment of our payout grids. Furthermore, the Tax Software business had increased personnel costs and depreciation of capitalized software during such period. Continued investments in internally developed softwareincremental cash sweep revenue for the ~~Tax Software business are expected~~three and six months ended June 30, 2023, compared to ~~result in increased depreciation in future periods.~~the three and six months ended June 30, 2022.

Engineering and Technology


($ in thousands)	($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change				($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
		2022			2021			$		%		2022			2021			$		%			2023			2022			$		%		2023			2022			$		%
Engineering and technology	Engineering and technology	$	8,620		$	7,231		$	1,389	19.2	%	$	17,124		$	14,359		$	2,765	19.3	%	Engineering and technology	$	2,191		$	2,302		$	(111)	(4.8)	%	$	4,912		$	4,116		$	796	19.3	%
Percentage of revenue	Percentage of revenue	3.4		%	2.8		%					3.0		%	2.7		%					Percentage of revenue	1.2		%	1.4		%					1.3		%	1.3		%

Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our ~~offerings,~~platforms, which include personnel expenses (including stock-based compensation), the cost of temporary help and contractors, software support and maintenance, ~~bandwidth and hosting,~~ and professional services fees. Engineering and technology expenses do not include the costs of computer hardware and software that are capitalized, depreciated over their useful lives, and recognized on the consolidated statements of ~~operations~~comprehensive income (loss) as ~~either “Cost of Revenue” or~~ “Depreciation.” For more information, see the “~~Cost of Revenue” and~~ “Depreciation and Amortization of Acquired Intangible Assets” sections contained within this discussion of “Operating Expenses.”

For the three and six months ended June 30, ~~2022,~~2023, compared to the three ~~months ended June 30, 2021, engineering~~ and ~~technology expenses increased $1.4 million primarily due to increases in personnel expenses across both segments.~~

~~For the~~ six months ended June 30, 2022, ~~compared to the six months ended June 30, 2021,~~ engineering and technology expenses ~~increased $2.8 million primarily due to increases in personnel expenses in our Tax Software segment.~~did not materially change.

Sales and Marketing


($ in thousands)	($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change				($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
		2022			2021			$		%		2022			2021			$		%			2023			2022			$		%		2023			2022			$		%
Sales and marketing	Sales and marketing	$	47,508		$	34,848		$	12,660	36.3	%	$	131,911		$	112,410		$	19,501	17.3	%	Sales and marketing	$	27,423		$	24,882		$	2,541	10.2	%	$	53,604		$	47,056		$	6,548	13.9	%
Percentage of revenue	Percentage of revenue	18.5		%	13.7		%					23.4		%	21.1		%					Percentage of revenue	14.7		%	15.3		%					14.7		%	14.3		%

Sales and marketing expenses primarily consist of ~~marketing expenses associated with~~the costs to support our ~~Tax Software business~~financial professionals and drive growth. This includes personnel costs (including ~~expenses related to marketing agencies~~stock-based compensation) for operational and ~~media companies)~~back-office processing support, investment and ~~our Wealth Management business, personnel expenses,~~portfolio strategy support, compliance, and compensation paid to Avantax

Avantax, Inc. | Q2 2023 Form 10-Q 30

Planning Partners in-house/employee financial ~~professionals, the cost of temporary help~~professionals. These costs also include business development costs related to advisor recruitment and ~~contractors,~~retention, costs related to hosting certain advisor conferences that serve as training, sales and ~~back-office processing~~marketing events, and other costs that support ~~expenses for our Wealth Management business.~~advisor business growth.

For the three and six months ended June 30, ~~2022,~~2023, compared to the three and six months ended June 30, ~~2021,~~2022, sales and marketing expenses increased ~~$12.7~~$2.5 million and ~~$19.5~~$6.5 million, respectively, primarily due to ~~the following factors:~~

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 29~~

•~~Strategic advertising~~incremental personnel costs. The increase in personnel costs is associated with higher employee benefit costs and ~~marketing costs~~growth in our ~~Tax Software segment increased $7.0 million~~Avantax Planning Partners business and ~~$9.5 million, respectively.~~

•~~Personnel costs in both segments increased $5.2 million~~investments to enhance our sales and ~~$8.7 million, respectively.~~service capabilities that support our financial professionals.

General and Administrative


($ in thousands)	($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change				($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
		2022			2021			$		%		2022			2021			$		%			2023			2022			$		%		2023			2022			$		%
General and administrative	General and administrative	$	26,646		$	23,832		$	2,814	11.8	%	$	55,721		$	48,517		$	7,204	14.8	%	General and administrative	$	26,335		$	21,721		$	4,614	21.2	%	$	58,736		$	45,596		$	13,140	28.8	%
Percentage of revenue	Percentage of revenue	10.4		%	9.4		%					9.9		%	9.1		%					Percentage of revenue	14.1		%	13.4		%					16.1		%	13.9		%

General and administrative (“G&A”) expenses primarily consist of personnel expenses (including stock-based compensation), the cost of temporary help and contractors, professional services fees, general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.

For the three months ended June 30, 2023, compared to the three months ended June 30, 2022, G&A expenses increased $4.6 million, primarily due to the following:

•Executive transition costs of $1.2 million associated with certain executives that departed the company.

•Legal, consulting, and other professional costs of $4.8 million associated with the TaxAct Sale and our reorganization activities.

These increases were partially offset by a $1.1 million reduction in contested proxy and other legal and consulting costs and lower rent and facilities charges associated with the sublease of a portion of our corporate headquarters.

For the six months ended June 30, 2023, compared to the six months ended June 30, 2022, ~~compared to the three and six months ended June 30, 2021,~~ G&A expenses increased ~~$2.8~~$13.1 million, ~~and $7.2 million, respectively,~~ primarily due to ~~incremental~~the following:

•Executive transition costs of $6.4 million associated with certain executives that departed the company.

•Legal, consulting, and other professional costs of $9.1 million associated with the TaxAct Sale and our reorganization activities.

•Incremental personnel costs of $0.9 million primarily due to increased stock-based compensation for certain executive awards that were accelerated under the Company’s Executive Change of Control Severance Plan.

These increases were partially offset by a $3.4 million reduction in contested proxy and ~~hardware~~other legal and ~~software support~~consulting costs and ~~maintenance fees.~~lower rent and facilities charges associated with the sublease of a portion of our corporate headquarters.

Avantax, Inc. | Q2 2023 Form 10-Q 31

Acquisition and Integration


($ in thousands)	($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change				($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
		2022			2021			$		%		2022			2021			$		%			2023			2022			$		%		2023			2022			$		%

Change in the fair value of HKFS Contingent Consideration		$	(7,020)		$	11,500		$	(18,520)	(161.0)	%	$	(5,320)		$	17,800		$	(23,120)	(129.9)	%
Professional services and other expenses	Professional services and other expenses	228			6,669			(6,441)		(96.6)	%	194			8,472			(8,278)		(97.7)	%	Professional services and other expenses	$	(39)		$	228		$	(267)	(117.1)	%	$	83		$	194		$	(111)	(57.2)	%
Change in the fair value of acquisition-related contingent consideration																						Change in the fair value of acquisition-related contingent consideration	—			(7,020)			7,020		100.0	%	—			(5,320)			5,320		100.0	%
Total	Total	$	(6,792)		$	18,169		$	(24,961)	(137.4)	%	$	(5,126)		$	26,272		$	(31,398)	(119.5)	%	Total	$	(39)		$	(6,792)		$	6,753	99.4	%	$	83		$	(5,126)		$	5,209	101.6	%
Percentage of revenue	Percentage of revenue	(2.6)		%	7.1		%					(0.9)		%	4.9		%					Percentage of revenue	—		%	(4.2)		%					—		%	(1.6)		%

Acquisition and integration expenses primarily relate to costs incurred for the acquisitions of Avantax Planning Partners and 1st Global and consist of employee-related expenses, professional services fees, changes in the fair value of contingent consideration, and other expenses.

For the three and six months ended June 30, ~~2022,~~2023, compared to the three and six months ended June 30, ~~2021,~~2022, acquisition and integration expenses ~~decreased $25.0~~increased $6.8 million and ~~$31.4~~$5.2 million, respectively, primarily due to ~~the following factors:~~

•~~The change in~~prior period acquisition-related contingent consideration fair value of the HKFS Contingent Consideration liability declined $18.5 million and $23.1 million, respectively. These changes are inclusive of a $7.0 million gain recorded during the three months ended June 30, 2022, reflecting a decrease in the fair value of the contingent consideration due to a significant decline in advisory asset levels during the second quarter of 2022, which was caused by the market decline discussed in the sections above.

•~~Professional services and other expenses declined $6.4 million and $8.3 million, respectively, due to a reduction in integration activities.~~adjustments.

Depreciation and Amortization of Acquired Intangible Assets


($ in thousands)	($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change				($ in thousands)	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
		2022			2021			$		%		2022			2021			$		%			2023			2022			$		%		2023			2022			$		%
Depreciation	Depreciation	$	3,137		$	3,204		$	(67)	(2.1)	%	$	6,068		$	5,504		$	564	10.2	%	Depreciation	$	3,588		$	2,642		$	946	35.8	%	$	7,176		$	5,085		$	2,091	41.1	%
Amortization of acquired intangible assets	Amortization of acquired intangible assets	6,462			7,063			(601)		(8.5)	%	13,093			14,238			(1,145)		(8.0)	%	Amortization of acquired intangible assets	6,231			6,462			(231)		(3.6)	%	12,569			13,093			(524)		(4.0)	%
Total	Total	$	9,599		$	10,267		$	(668)	(6.5)	%	$	19,161		$	19,742		$	(581)	(2.9)	%	Total	$	9,819		$	9,104		$	715	7.9	%	$	19,745		$	18,178		$	1,567	8.6	%
Percentage of revenue	Percentage of revenue	3.7		%	4.0		%					3.4		%	3.7		%					Percentage of revenue	5.3		%	5.6		%					5.4		%	5.5		%

Depreciation of property, equipment, and software, net includes depreciation of computer equipment and software (including internally developed software), office equipment and furniture, and leasehold improvements. Amortization of acquired intangible assets primarily includes the amortization of financial professional, sponsor, and ~~customer~~client relationships, which are amortized over their estimated lives.

~~Blucora, Inc.~~ | ~~Q2 2022 Form 10-Q 30~~

For the three and six months ended June 30, ~~2022,~~2023, compared to the three and six months ended June 30, ~~2021,~~2022, depreciation expense increased $0.9 million and ~~amortization~~$2.1 million, respectively, primarily due to increased capital expenditures for internally developed software. Amortization expense did not materially change.

INTEREST EXPENSE AND OTHER, NET

For the three months ended June 30, 2023, compared to the three months ended June 30, 2022, interest expense and other, net, increased $4.5 million. Total interest expense increased $4.9 million, due to borrowings on our Delayed Draw Term Loan Facility, which was partially offset by income received from the transition services agreement initiated in connection with the TaxAct Sale.

Avantax, Inc. | Q2 2023 Form 10-Q 32

For the six months ended June 30, 2023, compared to the six months ended June 30, 2022, ~~compared to the three and six months ended June 30, 2021,~~ interest expense and other, net, ~~did not materially change. As the~~increased $3.5 million. Total interest ~~rate~~expense increased $6.6 million, due to borrowings on our Delayed Draw Term Loan ~~is variable at~~Facility, which was partially offset by income received from the ~~London Interbank Offered Rate, we expect for our interest expense to increase~~transition services agreement initiated in ~~future periods due to increasing interest rates.~~connection with the TaxAct Sale, and incremental other income associated with the settlement of escrow funds from a previous acquisition.

Our provision for income taxes in interim periods is based on our estimated annual effective tax rate. We record cumulative adjustments in the quarter in which a change in the estimated annual effective rate is determined. The estimated annual effective tax rate does not include the effects of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.

We recorded income tax expense of ~~$3.2~~$2.1 million and ~~$5.8~~$1.6 million for the three and six months ended June 30, ~~2022, respectively, and income tax expense of $2.0 million and $3.7 million for the three and six months ended June 30, 2021,~~2023, respectively. The prior period interim tax provision was prepared by applying a year-to-date effective tax rate to income before income taxes. The current period interim tax provision was prepared by applying an estimated annual effective tax rate to income before income taxes and by calculating the tax effect of discrete items recognized during the quarter (if applicable).

Our effective income tax rate for the three and six months ended June 30, ~~2022,~~2023 differed from the 21% statutory rate primarily due to non-deductible compensation and the effect of state taxes.

DISCONTINUED OPERATIONS

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

During the six months ended June 30, 2023, we ~~have concluded it~~finalized our previously estimated closing date working capital balance, resulting in an incremental pre-tax gain of $2.5 million which is ~~more likely than not that~~included within “Pre-tax gain on disposal” in the ~~related deferred tax benefits will not be realized. This valuation allowance does not prevent us from utilizing unexpired net operating losses to offset taxable~~condensed consolidated statements of comprehensive income ~~in future periods. The majority of these net operating losses will either be utilized or expire between 2022 and 2024.~~(loss).

NON-GAAP FINANCIAL MEASURES

We define Adjusted EBITDA as net income (loss), determined in accordance with GAAP, excluding the effects of discontinued operations, stock-based compensation, depreciation and amortization of acquired intangible assets, interest expense and other, net, acquisition and integration costs, contested proxy and other legal and consulting costs, executive transition costs, TaxAct transaction related costs, reorganization costs, hedging program start-up costs, and income tax (benefit) expense. Interest expense and other, net primarily consists of interest expense, ~~net.~~net, unrealized mark-to-market (“MTM”) derivative losses (gains) for our interest rate cap derivative instruments, and other non-operating income. It does not include the income associated with the transition services agreement signed in connection with the TaxAct Sale as this income offsets costs included within income from continuing operations, or realized income or loss associated with our interest rate cap derivative instruments. Acquisition and integration costs primarily relate to the acquisitions of Avantax Planning Partners and 1st Global. Hedging program start-up costs include consulting and accounting costs incurred for the implementation of our cash sweep interest rate hedging program.

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 (loss). Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

~~Blucora,~~Avantax, Inc. | Q2 ~~2022~~2023 Form 10-Q 3133

A reconciliation of GAAP net income (loss), which we believe to be the most comparable GAAP measure, to Adjusted EBITDA, is presented below:


		Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	($ in thousands)	2022		2021		2022		2021		($ in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
											2023		2022		2023		2022
Net income	Net income	$	39,425	$	31,608	$	74,045	$	59,254	Net income	$	3,581	$	39,425	$	5,254	$	74,045
Less: Income from discontinued operations, net of income taxes										Less: Income from discontinued operations, net of income taxes	—		38,578		1,921		69,646
Income from continuing operations, net of income taxes										Income from continuing operations, net of income taxes	3,581		847		3,333		4,399
Stock-based compensation	Stock-based compensation	5,198		5,160		11,423		10,770		Stock-based compensation	3,291		4,438		11,093		9,818
Depreciation and amortization of acquired intangible assets	Depreciation and amortization of acquired intangible assets	11,464		11,165		22,769		21,583		Depreciation and amortization of acquired intangible assets	9,819		9,104		19,745		18,178
Interest expense and other, net	Interest expense and other, net	8,117		8,024		15,958		15,907		Interest expense and other, net	5,774		212		6,483		265
Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration		228		6,669		194		8,472
Acquisition and integration—Change in the fair value of HKFS Contingent Consideration		(7,020)		11,500		(5,320)		17,800

Acquisition and integration—Excluding change in the fair value of acquisition-related contingent consideration										Acquisition and integration—Excluding change in the fair value of acquisition-related contingent consideration	(39)		228		83		194
Acquisition and integration—Change in the fair value of acquisition-related contingent consideration										Acquisition and integration—Change in the fair value of acquisition-related contingent consideration	—		(7,020)		—		(5,320)

Contested proxy and other legal and consulting costs	Contested proxy and other legal and consulting costs	1,397		2,465		4,317		5,695		Contested proxy and other legal and consulting costs	48		1,195		694		4,115
Income tax expense		3,243		1,994		5,825		3,694
Executive transition costs										Executive transition costs	1,185		—		6,412		—
TaxAct transaction related costs										TaxAct transaction related costs	1,528		202		4,159		202
Reorganization costs										Reorganization costs	3,227		—		4,966		—
Hedging program start-up costs										Hedging program start-up costs	583		—		583		—
Income tax (benefit) expense										Income tax (benefit) expense	2,073		(4,053)		1,592		(21,046)
Adjusted EBITDA	Adjusted EBITDA	$	62,052	$	78,585	$	129,211	$	143,175	Adjusted EBITDA	$	31,070	$	5,153	$	59,143	$	10,805

Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) Per Share

We define Non-GAAP Net Income (Loss) as net income (loss), determined in accordance with GAAP, excluding the effects of ~~stock-based compensation,~~discontinued operations, amortization of acquired intangible assets, acquisition and integration costs, contested proxy and other legal and consulting costs, executive transition costs, TaxAct transaction related costs, reorganization costs, hedging program start-up costs, unrealized MTM derivative losses (gains) for our interest rate cap derivative instruments, and the related ~~cash~~ tax impact of those adjustments. Unrealized MTM derivative losses (gains) include the unrealized portion of gains and losses that are caused by changes in the fair values of derivatives which do not qualify for hedge accounting treatment under GAAP. It does not include realized income or loss associated with these instruments. The tax impact of these adjustments ~~and non-cash~~is determined using the income tax ~~(benefit) expense. We exclude~~rates in effect for the non-cash portion of income taxes because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these net operating losses will expire, if not utilized, between 2022 and 2024.applicable period, adjusted for any potentially non-deductible amounts.


PART I . FINANCIAL INFORMATION		Page
Item 1.	Financial Statements	5
	Condensed Consolidated Balance Sheets (Unaudited)	5
	Condensed Consolidated Statements of ~~Operations~~Comprehensive Income (Loss) (Unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1923
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3840
Item 4.	Controls and Procedures	3841

PART II . OTHER INFORMATION
Item 1.	Legal Proceedings	3841
Item 1A.	Risk Factors	3841
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3842
Item 3.	Defaults Upon Senior Securities	3942
Item 4.	Mine Safety Disclosures	3942
Item 5.	Other Information	3942
Item 6.	Exhibits	4043

Signatures		4144


	June 30, 2022		December 31, 2021
	Senior Secured Credit Facility
Principal outstanding	$	560,438	$	561,344
Unamortized debt issuance costs	(2,714)		(3,371)
Unamortized debt discount	(2,436)		(3,027)
Net carrying value	$	555,288	$	554,946


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs
January 1-31, 2022	190	$	15.73	190	$	97,007
February 1-28, 2022	524	$	18.12	524	$	87,510
March 1-31, 2022	931	$	19.39	931	$	69,463
April 1-30, 2022	230	$	19.40	230	$	65,000
May 1-31, 2022	—	$	—	—	$	65,000
June 1-30, 2022	—	$	—	—	$	65,000






Total	1,875	$	18.67	1,875


#						Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Blucora, Inc. hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

*						The certifications attached as Exhibits 32.1 and 32.2 are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of ~~Blucora,~~Avantax, Inc. under the Securities Act of 1933, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.


			~~BLUCORA,~~AVANTAX, INC.

			By:			/s/ Marc Mehlman
						Marc Mehlman Chief Financial Officer and Treasurer (On behalf of the registrant and as Principal Financial Officer)

			Date:			August ~~8, 2022~~9, 2023