UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from _____ to ______

Commission File Number 001-15799

Ladenburg Thalmann Financial Services Inc.
(Exact name of registrant as specified in its charter)
Florida
65-0701248
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
4400 Biscayne Boulevard, 12th Floor
 
Miami, Florida
33137
(Address of principal executive offices)
(Zip Code)
(305) 572-4100
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes__X__ 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
[x]
 
 
 
 
 
 
 
 
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  ___ No  X 
    
As of November 5, 2018 there were 198,452,881 shares of the registrant's common stock outstanding.




   

LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

 
 
Page
PART I. FINANCIAL INFORMATION
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART  II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except share and per share amounts)
 
September 30, 2018 
 (Unaudited)
 
December 31, 2017
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
262,834

 
$
172,103

Securities owned, at fair value
5,451

 
3,881

Receivables from clearing brokers
26,650

 
48,543

Receivables from other broker-dealers
1,472

 
2,822

Notes receivable from financial advisors, net
6,520

 
47,369

Other receivables, net
130,507

 
60,707

Fixed assets, net
28,590

 
23,621

Restricted cash
6,589

 
760

Intangible assets, net
74,233

 
103,611

Goodwill
125,966

 
124,210

Contract acquisition costs, net
77,803

 

Cash surrender value of life insurance
13,478

 
12,711

Other assets
40,498

 
31,687

      Total assets
$
800,591

 
$
632,025



 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
Securities sold, but not yet purchased, at fair value
$
66

 
$
231

Accrued compensation
32,013

 
33,343

Commissions and fees payable
109,247

 
67,221

Accounts payable and accrued liabilities
50,122

 
40,478

Deferred rent
2,970

 
2,151

Deferred income taxes
12,659

 
2,968

Deferred compensation liability
21,963

 
18,161

Accrued interest

 
232

Notes payable, net of unamortized discount of $115 and $424 in 2018 and 2017, respectively and net of debt issuance costs of $7,191 and $3,412 in 2018 and 2017, respectively.
185,199

 
96,849

      Total liabilities
414,239

 
261,634

 
 
 
 
Commitments and contingencies (Note 11)


 


SHAREHOLDERS' EQUITY:
 
 
 
Preferred stock, $.0001 par value; authorized 50,000,000 shares: 8% Series A cumulative redeemable preferred stock; designated 23,844,916 shares in 2018 and 2017; shares issued and outstanding 17,012,075 in 2018 and 2017 (liquidation preference $425,302 in 2018 and 2017)
2

 
2

Common stock, $.0001 par value; authorized 1,000,000,000 shares in 2018 and 2017; shares issued and outstanding, 200,251,796 in 2018 and 198,583,941 in 2017
20

 
20

   Additional paid-in capital
487,752

 
520,135

   Accumulated deficit
(101,467
)
 
(149,778
)
 
 
 
 
      Total shareholders’ equity of the Company
386,307

 
370,379

 
 
 
 
Noncontrolling interest
45

 
12

 
 
 
 
      Total shareholders' equity
386,352

 
370,391

 
 
 
 
      Total liabilities and shareholders' equity
$
800,591

 
$
632,025

See accompanying notes.

1




LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Commissions
 
$
172,108

 
$
131,467

 
$
515,775

 
$
394,492

Advisory fees
 
124,550

 
146,677

 
361,571

 
408,322

Investment banking
 
9,982

 
14,745

 
38,201

 
34,121

Principal transactions
 
45

 
107

 
445

 
685

Interest and dividends
 
1,434

 
629

 
3,301

 
1,921

Service fees
 
28,702

 
19,277

 
81,189

 
58,169

Other income
 
12,054

 
9,407

 
35,533

 
26,426

Total revenues
 
348,875

 
322,309

 
1,036,015

 
924,136

Expenses:
 
 
 
 
 
 
 
 
Commissions and fees
 
249,672

 
235,020

 
735,388

 
679,843

Compensation and benefits
 
44,905

 
45,131

 
140,727

 
125,131

Non-cash compensation
 
1,380

 
1,341

 
4,442

 
4,148

Brokerage, communication and clearance fees
 
3,734

 
4,173

 
11,994

 
13,647

Rent and occupancy, net of sublease revenue
 
2,566

 
2,305

 
7,446

 
7,165

Professional services
 
4,531

 
4,715

 
14,860

 
12,609

Interest
 
3,206

 
601

 
7,226

 
1,599

Depreciation and amortization
 
5,845

 
7,104

 
17,416

 
21,830

Acquisition-related expenses
 

 
55

 
913

 
320

Amortization of retention and forgivable loans
 
97

 
1,808

 
280

 
5,070

Amortization of contract acquisition costs
 
2,488

 

 
7,059

 

Other
 
17,740

 
15,396

 
53,922

 
51,534

Total expenses
 
336,164

 
317,649

 
1,001,673

 
922,896

Income before item shown below
 
12,711

 
4,660

 
34,342

 
1,240

Change in fair value of contingent consideration
 
(54
)
 
(3
)
 
(165
)
 
86

Income before income taxes
 
12,657

 
4,657

 
34,177

 
1,326

Income tax expense
 
3,207

 
1,255

 
9,953

 
278

Net income
 
9,450

 
3,402

 
24,224

 
1,048

Net income (loss) attributable to noncontrolling interest
 
13

 
3

 
22

 
(5
)
Net income attributable to the Company
 
$
9,437

 
$
3,399

 
$
24,202

 
$
1,053

Dividends declared on preferred stock
 
(8,507
)
 
(8,149
)
 
(25,523
)
 
(24,026
)
Net income (loss) available to common shareholders
 
$
930

 
$
(4,750
)
 
$
(1,321
)
 
$
(22,973
)
 
 
 
 
 
 
 
 
 
Net income (loss) per common share available to common shareholders (basic)
 
$
0.00

 
$
(0.02
)
 
$
(0.01
)
 
$
(0.12
)
 
 
 
 
 
 
 
 
 
Net income (loss) per common share available to common shareholders (diluted)
 
$
0.00

 
$
(0.02
)
 
$
(0.01
)
 
$
(0.12
)
 
 
 
 
 
 
 
 
 
Weighted average common shares used in computation of per share data:
 
 
 
 
 
 
 
 
Basic
 
196,381,910

 
192,912,643

 
196,281,283

 
192,498,380

Diluted
 
208,387,236

 
192,912,643

 
196,281,283

 
192,498,380

See accompanying notes.

2



LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Amounts in thousands, except share amounts)
(Unaudited)


 
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Noncontrolling Interest
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2017
 
17,012,075

 
$
2

 
198,583,941

 
$
20

 
$
520,135

 
$
(149,778
)
 
$
12

 
$
370,391

Cumulative effect of adoption of ASC 606 (See Note 3)
 

 

 

 

 

 
24,109

 
11

 
24,120

Balance - January 1, 2018
 
17,012,075

 
2

 
198,583,941

 
20

 
520,135

 
(125,669
)
 
23

 
394,511

Issuance of common stock under employee stock purchase plan
 

 

 
122,192

 

 
365

 

 

 
365

Exercise of stock options (net of 203,132 shares tendered in payment of exercise price)
 

 

 
2,285,314

 

 
3,636

 

 

 
3,636

Stock-based compensation granted to advisory board, consultants and independent financial advisors
 

 

 

 

 
34

 

 

 
34

Stock-based compensation to employees
 

 

 

 

 
4,408

 

 

 
4,408

Issuance of restricted stock
 

 

 
2,115,000

 

 

 

 

 

Restricted stock forfeitures
 




(106,250
)








 

Repurchase and retirement of common stock, including 247,379 shares surrendered for tax withholdings and 19,294 shares tendered in payment of exercise price
 

 

 
(2,748,401
)
 

 
(8,746
)
 

 

 
(8,746
)
Preferred stock issued, net of underwriting discount and expense of $180
 

 

 

 

 
(180
)
 

 

 
(180
)
Preferred stock dividends declared and paid
 

 

 

 

 
(25,523
)
 

 

 
(25,523
)
Common stock dividends declared and paid
 

 

 

 

 
(6,377
)
 

 

 
(6,377
)
Net income
 

 

 

 

 

 
24,202

 
22

 
24,224

Balance - September 30, 2018
 
17,012,075

 
$
2

 
200,251,796

 
$
20

 
$
487,752

 
$
(101,467
)
 
$
45

 
$
386,352



See accompanying notes.

3

LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
24,224

 
$
1,048

      Adjustments to reconcile net income to
 
 
 
          net cash provided by operating activities:
 
 
 
Change in fair value of contingent consideration
165

 
(86
)
Adjustment to deferred rent
819

 
319

Amortization of intangible assets
11,552

 
16,142

Amortization of debt discount
428

 
337

Amortization of debt issue cost
401

 

Amortization of retention and forgivable loans
280

 
5,070

Amortization of contract acquisition costs
7,059

 

Depreciation and other amortization
5,864

 
5,688

Deferred income taxes
6,056

 
(161
)
Non-cash interest expense on forgivable loan

 
266

Non-cash compensation expense
4,442

 
4,148

Gain on forgiveness of accrued interest under forgivable loans
(79
)
 

Gain on forgiveness of principal of note payable under forgivable loans
(2,143
)
 

Loss on write-off of furniture, fixtures and leasehold improvements, net
18

 
1

 
 
 
 
(Increase) decrease in operating assets
 
 
 
Securities owned, at fair value
(1,570
)
 
(604
)
Receivables from clearing brokers
21,893

 
(15,230
)
Receivables from other broker-dealers
1,350

 
(1,074
)
Other receivables, net
(11,151
)
 
5,843

Contract acquisition costs, net
(23,522
)
 

Notes receivable from financial advisors, net
3

 
(6,443
)
Cash surrender value of life insurance
(767
)
 
(1,990
)
Other assets
(8,786
)
 
(5,019
)
 
 
 
 
Increase (decrease) in operating liabilities
 
 
 
Securities sold, but not yet purchased, at fair value
(165
)
 
(184
)
Accrued compensation
(1,220
)
 
2,308

Accrued interest
(153
)
 
(65
)
Commissions and fees payable
12,631

 
1,790

Deferred compensation liability
3,802

 
1,239

Accounts payable and accrued liabilities
9,932

 
3,105

      Net cash provided by operating activities   
61,363

 
16,448

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of fixed assets
(10,503
)
 
(7,258
)
Purchase of intangible assets
(6
)
 

Acquisition of certain assets of Kestler Financial Group
(1,683
)
 

Acquisition of certain assets of Foothill Securities:

 
(180
)
      Net cash used in investing activities   
(12,192
)
 
(7,438
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of Series A preferred stock
(180
)
 
18,032

Issuance of common stock
4,001

 
4,376

Issuance of senior notes
106,081

 

Series A preferred stock dividends paid
(25,523
)
 
(24,026
)
Common stock dividends paid
(6,377
)
 
(1,962
)
Repurchase of stock option award for cash


(850
)
Repurchase and retirement of common stock
(8,746
)
 
(4,450
)
Borrowings on term loan

 
8,000

Bank loan and revolver repayments
(6,658
)
 
(1,305
)
Principal payments on notes payable
(15,209
)
 
(5,267
)
      Net cash provided by (used in) financing activities   
47,389

 
(7,452
)
Net increase in cash and cash equivalents
96,560

 
1,558

      Cash and cash equivalents including restricted cash, beginning of period
172,863

 
99,941

      Cash and equivalents at end of period:
 
 
 
      Cash and cash equivalents
262,834

 
100,739

      Restricted cash
6,589

 
760

      Cash and cash equivalents including restricted cash, end of period   
$
269,423

 
$
101,499

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
6,551

 
$
1,062

Taxes paid
2,786

 
566

 
 
 
 
Acquisition of certain assets of Foothill Securities:
 
 


Assets acquired
$

 
$

Contingent consideration payable to seller

 
(180
)
Net cash paid in acquisition
$

 
$
(180
)
 
 
 
 
Acquisition of certain assets of Kestler Financial Group:
 
 
 
Assets acquired
$
7,917

 
$

Liabilities assumed
(784
)
 

Net assets acquired
7,133

 

Promissory note
(5,450
)
 

Net cash paid in acquisition
$
1,683

 
$

 
 
 
 


See accompanying notes.

4



LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Amounts in thousands, except share and per share amounts)

1. Description of Business and Basis of Presentation

Ladenburg Thalmann Financial Services Inc. (the “Company” or “LTS”) is a holding company. Its principal operating subsidiaries are Securities America (‘‘Securities America’’), Triad Advisors (‘‘Triad’’), Investacorp (‘‘Investacorp’’), KMS Financial Services (“KMS”), Securities Service Network (“SSN”), Ladenburg Thalmann & Co. (‘‘Ladenburg’’), Ladenburg Thalmann Asset Management (‘‘LTAM’’), Premier Trust (‘‘Premier Trust’’), Highland Capital Brokerage (“Highland”) and Ladenburg Thalmann Annuity Insurance Services (‘‘LTAIS’’).

Securities America, Triad, Investacorp, KMS and SSN are registered investment advisors and broker-dealers that serve the independent financial advisor community. The independent financial advisors of these independent advisory and brokerage firms primarily serve retail clients. Such entities derive revenue from advisory fees and commissions, primarily from the sale of mutual funds, variable annuity products and other financial products and services.

Ladenburg is a full service registered broker-dealer that has been a member of the New York Stock Exchange since 1879. Broker-dealer activities include sales and trading and investment banking. Ladenburg provides its services principally to middle-market and emerging growth companies and high net worth individuals through a coordinated effort among corporate finance, capital markets, brokerage and trading professionals.

LTAM is a registered investment advisor. It offers various asset management products utilized by Ladenburg and Premier Trust’s clients, as well as clients of the Company's independent financial advisors.

Premier Trust, a Nevada trust company, provides wealth management services, including administration of personal trusts and retirement accounts, estate and financial planning and custody services.

Highland is an independent insurance broker that delivers life insurance, fixed and equity indexed annuities and long-term care solutions to investment and insurance providers. Highland provides specialized point-of-sale support along with advanced marketing and estate and business planning techniques, delivering customized insurance solutions to both institutional clients and independent producers. LTAIS provides marketing strategies, product expertise, and back-office processing for fixed and equity-indexed annuities.

Securities America's, Triad's, Investacorp's, KMS's, SSN's and Ladenburg's customer transactions are cleared through clearing brokers on a fully-disclosed basis and such entities are subject to regulation by, among others, the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board. Each entity is a member of the Securities Investor Protection Corporation. Highland and LTAIS are subject to regulation by various regulatory bodies, including state attorneys general and insurance departments. Premier Trust is subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division.

Basis of Presentation

The condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Because of the nature of the Company’s business, interim period results may not be indicative of full year or future results.

The unaudited condensed consolidated financial statements do not include all information and notes required in annual audited financial statements in conformity with GAAP. The statement of financial condition at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statement presentation. Please refer to the notes to the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2017 for additional disclosures and a description of accounting policies.
 

5

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



Certain amounts in the prior period financial statements were reclassified to conform with the current period financial statement presentation.

New Accounting Standards Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which completes the joint effort by the FASB and the International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and the International Financial Reporting Standards. The new guidance outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. ASU 2014-09 also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations.

On January 1, 2018, the Company adopted ASU 2014-09 and all related amendments ("ASC 606") and applied its provisions to all uncompleted contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to increase the opening balance of retained earnings by $24,109. The comparative information for prior periods has not been adjusted and continues to be reported under the accounting standards in effect for those periods. See Note 3 for further information.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. On January 1, 2018, the Company adopted ASU 2016-01. The adoption of ASU 2016-01 effective January 1, 2018 did not have any impact on the Company's consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230). ASU 2016-18 provides guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2017 using a retrospective adoption method. The adoption of ASU 2016-18, effective January 1, 2018, did not have any impact on the Company's consolidated financial statements.

Accounting Standards Issued But Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. The Company will adopt the provisions of this guidance on January 1, 2019. In July 2018, the FASB issued updated guidance which allows an additional transition method to adopt the new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption. The Company plans to elect this transition method on January 1, 2019.
The Company's current lease arrangements expire through 2032.

The Company has established an implementation team that has gathered and analyzed a significant portion of its lease contracts. These implementation efforts include reviewing existing leases and service contracts, which may include embedded leases. Based on the preliminary results of this process, which has not been completed, the Company does not expect that this standard will have a material effect on the Company’s consolidated financial statements.



6

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



While the Company continues to assess all of the effects of adoption, the Company currently believes the most significant effect relates to the recognition of new right of use assets and corresponding lease liabilities on the Company’s balance sheet for operating leases. The Company’s evaluation of ASU No. 2016-02 is ongoing and may identify additional impacts on the Company’s consolidated financial statements.

The Company is in the process of evaluating changes to its business processes, systems and controls needed to support recognition and disclosure under the new standard. Further, the Company is continuing to assess any incremental disclosures that will be required in the Company's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU amends the requirement on the measurement and recognition of expected credit losses for financial assets held.  The ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted, but not earlier than annual and interim periods beginning after December 15, 2018. This amendment should be applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, an amendment to simplify the subsequent quantitative measurement of goodwill by eliminating step two from the goodwill impairment test. As amended, an entity will recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform the qualitative test for a reporting unit to determine if the quantitative impairment test is necessary. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and applies prospectively. Early adoption is permitted, including in an interim period, for impairment tests performed after January 1, 2017. The Company has not elected to early adopt ASU 2017-04. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees by aligning the accounting with the requirements for employee share-based compensation. ASU 2018-07 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company has assessed the impact that the adoption of ASU 2018-07 is not material to its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. The update eliminates the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and introduces a requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company plans to adopt this new accounting standard on January 1, 2020. Adoption is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

2. Acquisitions

In August 2018, LTAIS purchased certain assets of the insurance distribution business operated by Kestler Financial Group, Inc. (“KFG”), an independent insurance and annuity distribution company, located in Leesburg, Virginia. This asset purchase was deemed to be an asset acquisition. Under the terms of an asset purchase agreement, LTAIS purchased certain KFG assets, including the rights to the "Kestler Financial Group" name and brand. In October 2018, Securities America purchased certain assets of the brokerage business operated by KFG.

The consideration for the KFG insurance distribution transaction was $7,917, consisting of cash of $1,683 paid at closing, a $165 cash payment to be made on the first anniversary of the closing date, a promissory note in the original principal amount of $5,450 and contingent consideration having a fair value of $619, for which a liability was recognized based on estimated acquisition-date fair value of the potential earn-out.


7

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



The consideration for the KFG brokerage business transaction, which closed in October, was $1,335, consisting of cash of $537 paid at closing (including $271 of reimbursable expenses), a $266 cash payment to be made on each anniversary of the closing date for the next three years and contingent consideration having a fair value of $0.

The liability was valued using an income-based approach of the earn-out’s probability-weighted expected payout using three earn-out scenarios. The measurement of the earn-out, which relates to a five year period, is based on unobservable inputs (Level 3) and reflects the Company’s own assumptions. The purchase price for the KFG insurance distribution transaction was allocated (preliminary) $6,161 to identifiable intangibles and other assets and $1,756 to goodwill.

Results of operations relating to KFG, which are included in the accompanying consolidated statements of operations from their respective date of acquisition, were not material. In addition, based on materiality, pro forma results were not presented.

In October 2018, Highland purchased certain assets of Four Seasons Financial Group, Inc. (“FSFG”), a wholesale insurance distribution business located in Marlton, New Jersey.  The consideration for the FSFG transaction was $1,722, consisting of cash of $450 paid upon closing, a $450 cash payment to be made on each anniversary of the closing date for the next two years and promissory notes in the original principal amount of $372. In addition, Highland may be required to deliver, during the five years following the closing date, an annual payment to FSFG based on the adjusted net revenue of the business acquired by Highland.

3. Revenue from Contracts with Customers

The Company adopted ASC 606, effective January 1, 2018, using the modified retrospective method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of shareholders' equity and other affected accounts at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under the accounting standards in effect for prior periods.

Performance Obligations

Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring promised goods or services to customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for those promised goods or services.

The following provides detailed information on the recognition of the Company's revenue from contracts with customers:

Broker-Dealer Commissions

The Company’s broker-dealer subsidiaries earn commissions by executing client transactions in stocks, mutual funds, variable annuities and other financial products and services as well as from annual trailing commissions. Commissions revenue is recognized on trade date when the performance obligation is satisfied. Commissions revenue is paid on settlement date, which is generally two business days after trade date for equities securities and corporate bond transactions and one business day for government securities and commodities transactions. The Company records a receivable on the trade date and receives a payment on settlement date.

Insurance Commissions

The Company’s performance obligation with respect to each contract is the sale of the insurance policy. Insurance commissions revenue includes an initial up-front (first year) commission as well as annual trailing commission payments for each policy renewal.Commissions on insurance renewal premiums are considered variable consideration.



8

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



ASC 606 requires that, at the time of the initial sale of a policy, the Company must estimate the variable consideration (future renewal commissions) and determine the transaction price as the unconstrained net present value of expected future renewal commissions.

Therefore, the transaction price includes the first year fixed commission and the variable consideration for the trailing commissions, estimated using the expected value method and a portfolio approach. Previously, the Company recognized trailing commissions as cash was received. The Company also estimates a reduction of the transaction price for possible future chargebacks. The Company controls the insurance services provided to the carriers and acts as a principal in providing insurance services to its customers. Accordingly, the Company records the first year and trailing commissions revenue on a gross basis when each policy is bound as an enforceable contract. Previously, the Company recorded revenue on a gross or net basis depending on how cash was received.

Advisory Fees

Advisory fee revenue represents fees charged by registered investment advisors (“RIAs”) to their clients based upon the value of client assets under management (“AUM”). The Company records fees charged to clients as advisory fees where the Company considers itself to be the primary RIA. The Company determined that the primary RIA firm is the principal in providing advisory services to clients and will therefore recognize the corresponding advisory fee revenues on a gross basis when the advisory services are conducted using the Company's corporate RIA platform.

As a result, the portion of the advisory fees paid to the client's independent financial advisor are classified as commissions and fees expense in the condensed consolidated statements of operations.

Certain independent financial advisors conduct their advisory business through their own RIA firm, rather than using one of the Company's corporate RIA subsidiaries. These independent entities, or Hybrid RIAs, engage the Company for clearing, regulatory and custody services, as well as for access to investment advisory platforms. The advisory fee revenue generated by these Hybrid RIAs is earned by the independent financial advisors, and is not included in the Company's advisory fee revenues. However, the Company charges separate fees to Hybrid RIAs for technology, custody and administrative services based on the AUM within the client’s accounts. These fees are recognized on a net basis and classified as advisory fees in the condensed consolidated statements of operations. Historically, the Company has generally recognized advisory fee revenue on a gross basis based on the fees charged by the independent financial advisors to their clients. Accordingly, the Company's reported advisory revenue and the independent financial advisors’ compensation in the Company's independent advisory and brokerage services segment is materially lower in 2018 as compared to the prior-year periods and reported advisory revenue growth may lag behind the overall growth rate of advisory assets.

Investment Banking

Investment banking revenues consist of underwriting revenue, strategic advisory revenue and private placement fees.

Underwriting
The performance obligation is the consummation of the sale of securities for each contract with a customer. The transaction price includes fixed management fees and is recognized as revenue when the performance obligation is satisfied, generally the trade date. Where Ladenburg is the lead underwriter, revenue and expenses will be first allocated to other members of a syndicate because Ladenburg is acting as an agent for the syndicate. Accordingly, the Company records revenue on a net basis. When Ladenburg is not the lead underwriter, Ladenburg will recognize its share of revenue and expenses on a gross basis, because Ladenburg is acting as the principal. Under accounting standards in effect for prior periods, the Company recognized all underwriting revenue on a net basis.

Strategic Advisory Services
Performance obligations in these arrangements vary dependent on the contract, but are typically satisfied upon completion of the arrangement. Transaction fees may include retainer, management, and/or success fees, which are recognized upon completion of a deal. Under the accounting standards in effect for prior periods, retainer fees were deferred and amortized over the estimated duration of the engagement.




9

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)





Ladenburg controls the service as it is transferred to the customer, and is therefore acting as a principal. Accordingly, the Company records revenues and out-of-pocket reimbursements on a gross basis, consistent with practice under the accounting standards in effect for those periods, except for out-of-pocket reimbursements previously presented on a net basis.

Private Placement
The performance obligation is the consummation of the sale of securities for each contract with a customer. The transaction price includes fixed management fees and is recognized as revenue when the performance obligation is satisfied, generally the trade date. Ladenburg controls the service as it is transferred to the customer, and is therefore acting as a principal.

Accordingly, the Company records revenues and out-of-pocket reimbursements on a gross basis, consistent with practice under the accounting standards in effect for those periods, except for out-of-pocket reimbursements previously presented on a net basis.

Service Fees

Service fees principally includes amounts charged to independent financial advisors for processing of securities trades and for providing administrative and compliance services. Also, the Company's subsidiaries earn fees from their cash sweep programs, in which clients' cash deposits in their brokerage accounts are swept into interest-bearing deposit accounts at various third-party banks.

Disaggregation of Revenue

In the following table, revenue is disaggregated by service line and segment:
For the Three Months Ended September 30, 2018
 
Independent Advisory and Brokerage Services
 
Ladenburg
 
Insurance Brokerage
 
Corporate
 
Total
Commissions
 
$
137,054

 
$
2,590

 
$
32,464

 
$

 
$
172,108

Advisory fees
 
122,848

 
1,644

 

 
58

 
124,550

Investment banking
 
129

 
10,038

 

 
(185
)
 
9,982

Principal transactions
 
(2
)
 
48

 

 
(1
)
 
45

Interest and dividends
 
700

 
185

 

 
549

 
1,434

Service fees
 
27,868

 
635

 

 
199

 
28,702

Other income
 
11,418

 
40

 
496

 
100

 
12,054

Total revenues
 
$
300,015

 
$
15,180

 
$
32,960

 
$
720

 
$
348,875






10

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



For the Nine Months Ended September 30, 2018
 
Independent Advisory and Brokerage Services
 
Ladenburg
 
Insurance Brokerage
 
Corporate
 
Total
Commissions
 
$
407,159

 
$
8,739

 
$
99,877

 
$

 
$
515,775

Advisory fees
 
356,051

 
5,352

 

 
168

 
361,571

Investment banking
 
558

 
38,497

 

 
(854
)
 
38,201

Principal transactions
 
5

 
433

 

 
7

 
445

Interest and dividends
 
1,854

 
420

 

 
1,027

 
3,301

Service fees
 
78,780

 
1,822

 

 
587

 
81,189

Other income
 
30,608

 
351

 
2,068

 
2,506

 
35,533

Total revenues
 
$
875,015

 
$
55,614

 
$
101,945

 
$
3,441

 
$
1,036,015




Contract Balances

For each of its insurance policies, the Company receives an initial up-front (first year) commission as well as annual trailing commission payments for each policy renewal. The Company will incur commission expenses related to the trailing commission payments for each policy renewal as well. The timing of revenue recognition, cash collections, and commission expense on the insurance policies results in contract assets and contract liabilities.
The following table provides information about contract assets and contract liabilities from contracts with customers. Estimated trailing commissions are included in other receivables, net while estimated expenses on trailing commissions are included in commissions and fees payable on the condensed consolidated statement of financial condition:
 
 
As of September 30, 2018
 
As of January 1, 2018 (Adoption Date)
Contract assets - Insurance trailing commissions
 
$
61,641

 
$
58,786

Contract liabilities - Insurance trailing commissions
 
30,612

 
29,395


Performance obligations related to insurance brokerage revenue are considered satisfied when the sale of the initial insurance policies are completed, including expected future trailing commissions due to the Company each year upon customer renewals of the policies sold. Upon receipt of the annual trailing commission, the Company pays a corresponding commission expense. Based on historical data, customer renewal periods are estimated at approximately eight years from the sale of the initial policy. Accordingly, all contract asset and liabilities associated with trailing insurance commissions are considered long-term, except for the renewals expected during 2018 which approximate $22,200 in contract assets and $11,100 in contract liabilities.
Increases to the contract asset were a result of $6,611 and $20,596 in estimated trailing commissions from new policies during the three and nine months ended September 30, 2018, respectively, while decreases were driven by $5,826 and $17,742 in actual commissions received during the three and nine months ended September 30, 2018, respectively. Increases to the contract liability were a result of $3,293 and $10,298 in estimated commission expense from new policies during the three and nine months ended September 30, 2018, respectively, while decreases were driven by $3,039 and $9,081 in actual commissions paid during the three and nine months ended September 30, 2018, respectively.




11

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



Costs to Obtain a Contract with a Customer

The Company capitalizes the incremental costs of obtaining a contract with a customer (independent financial advisor) if the costs (1) relate directly to an existing contract or anticipated contract, (2) generate or enhance resources that will be used to satisfy performance obligations in the future, and (3) are expected to be recovered. These costs are included in contract acquisition costs, net in the condensed consolidated statements of financial condition and will be amortized over the estimated customer relationship period.
The Company uses an amortization method that is consistent with the pattern of transfer of goods or services to its customers. Any costs that are not incremental costs of obtaining a contract with a customer, such as costs of onboarding, training and support of independent financial advisors, would not qualify for capitalization.
The Company pays fees to third-party recruiters and bonuses to employees for recruiting independent financial advisors to affiliate with the Company's independent advisory and brokerage subsidiaries, and thereby bring their client’s accounts to the Company, which generates ongoing advisory fee revenue, commissions revenue, and monthly service fee revenue to the Company.
An additional cost to obtain an independent financial advisor may include forgivable loans. Forgivable loans take many forms, but they are differentiated by the fact that at inception the loan is intended to be forgiven over time by the Company. The loans are given as an inducement to attract independent financial advisors to become affiliated with the Company's independent advisory and brokerage subsidiaries. Each of the Company’s independent advisory and brokerage subsidiaries may offer new independent financial advisors a forgivable loan as part of his/her affiliation offer letter. These amounts are paid upfront and are capitalized, then amortized over the expected useful lives of the independent financial advisor’s relationship period with the independent advisory and brokerage firm.
The balance of contract acquisition costs, net, was $77,803 as of September 30, 2018, an increase of $16,463 compared to the adoption date of January 1, 2018. Amortization on these contract acquisition costs was $7,059 during the nine months ended September 30, 2018. There were no impairments or changes to underlying assumptions related to contract acquisition costs, net, for the period.
Transaction Price Allocated to Remaining Performance Obligation

Contract liabilities represent accrued commission expense associated with the accrued insurance trailing commission contract assets. The Company does not have any contract liabilities representing revenues that will be recognized in future periods upon the satisfaction of any remaining performance obligations.
Practical Expedients

The following practical expedients available under the modified retrospective method were applied upon adoption of ASC 606:
1.
We applied the practical expedient outlined under ASC 606-10-65-1(h), and did not restate contracts that were completed contracts as of the date of initial application, i.e. January 1, 2018.

2.
We applied the practical expedient outlined under ASC 606-10-65-1(f)(4) and did not separately evaluate the effects of contract modifications. Instead, we reflect the aggregate effect of all the modifications that occurred before the initial application date, i.e. January 1, 2018.

3.
We applied the practical expedient outlined under ASC 606-10-10-4 that allows for the accounting for incremental costs of obtaining contracts at a portfolio level in order to determine the amortization period.

4.
We applied the practical expedient outlined under ASC 340-40-25-4 and did not capitalize the incremental costs to obtain a contract if the amortization period for the asset is one year or less.

Impacts on Financial Statements on January 1, 2018

The following table summarizes the impacts of ASC 606 adoption on the Company’s condensed consolidated statement of financial condition as of January 1, 2018.


12

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)




The Company adjusted notes receivable from financial advisors, net by reclassifying all of its forgivable loans to contract acquisition costs, net in the condensed consolidated statements of financial position. Previously, forgivable loans were amortized based on their legal terms, typically forgiven over periods ranging from 3 to 7 years as long as the associated independent financial advisor remained in compliance with the terms of the forgivable loan. Under ASC 606, the acquisition costs, net are amortized over the expected useful lives of the independent financial advisors’ relationship period with the Company.

The Company adjusted intangible assets, net by eliminating a portion of net intangible asset that was created through the Company’s acquisition of Highland in 2014. ASC 606 requires that, at the time of the initial sale of a policy, the Company must estimate the variable consideration (future renewal commissions) and determine the transaction price as the unconstrained net present value of expected future renewal commissions. As such, the Company accelerated the revenues recognized under its insurance policies and recorded an increase to other receivables, net that was offset by the partial elimination of the net intangible asset and an increase to commissions and fees payable.








13

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



Condensed Consolidated Statement of Financial Condition
 
 
 
 
 
 
 
 
 
As Reported
 
Adjustments
 
Adjusted
 
 
December 31, 2017
 
Investment Banking
Insurance Renewals
Costs to obtain or fulfill a contract
 
January 1, 2018
ASSETS
 
(Audited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
172,103

 
$

$

$

 
$
172,103

Securities owned, at fair value
 
3,881

 



 
3,881

Receivables from clearing brokers
 
48,543

 



 
48,543

Receivables from other broker-dealers
 
2,822

 



 
2,822

Notes receivable from financial advisors, net
 
47,369

 


(40,566
)
 
6,803

Other receivables, net
 
60,707

 
(137
)
58,786


 
119,356

Fixed assets, net
 
23,621

 



 
23,621

Restricted assets
 
760

 



 
760

Intangible assets, net
 
103,611

 

(23,645
)

 
79,966

Goodwill
 
124,210

 



 
124,210

Contract acquisition costs, net
 

 


61,340

 
61,340

Cash surrender value of life insurance
 
12,711

 



 
12,711

Other assets
 
31,687

 
25



 
31,712

 
 
 
 
 
 
 
 
 
Total assets
 
$
632,025

 
$
(112
)
$
35,141

$
20,774

 
$
687,828

 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 



 

 
 
 
 
 
 
 
 
 
Securities sold, but not yet purchased, at fair value
 
$
231

 
$

$

$

 
$
231

Accrued compensation
 
33,343

 
(110
)


 
33,233

Commissions and fees payable
 
67,221

 

29,395


 
96,616

Accounts payable and accrued liabilities
 
40,478

 
(104
)

(1,133
)
 
39,241

Deferred rent
 
2,151

 



 
2,151

Deferred income taxes
 
2,968

 
28

1,489

2,118

 
6,603

Deferred compensation liability
 
18,161

 



 
18,161

Accrued interest
 
232

 



 
232

Notes payable
 
96,849

 



 
96,849

Total liabilities
 
$
261,634

 
$
(186
)
$
30,884

$
985

 
$
293,317

 
 
 
 
 
 
 
 
 
Commitments and contingencies
 

 



 

Shareholders' equity:
 

 



 

Preferred stock
 
2

 



 
2

Common stock
 
20

 



 
20

Additional paid-in capital
 
520,135

 



 
520,135

Accumulated deficit
 
(149,778
)
 
74

4,257

19,778

 
(125,669
)
 
 
 
 
 
 
 
 
 
Total shareholders' equity of the Company
 
370,379

 
74

4,257

19,778

 
394,488

 
 
 
 
 
 
 
 
 
Noncontrolling interest
 
12

 


11

 
23

 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
370,391

 
74

4,257

19,789

 
394,511

 
 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
632,025

 
$
(112
)
$
35,141

$
20,774

 
$
687,828



14

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)




Impacts on Financial Statements at September 30, 2018

The following tables compare the reported condensed consolidated statement of financial condition and statements of operations as of and for the three and nine months ending September 30, 2018, to the pro-forma amounts had the previous accounting standards been in effect.

During the three and nine months ended September 30, 2018, the Company's net income as reported is greater than the net income amounts without the adoption of ASC 606 due to the following: 1) the timing of revenue recognized for commissions on future renewals of insurance policies sold is accelerated, as these future commissions represent variable consideration and are required to be estimated, 2) certain costs to obtain a contract with a customer are now capitalized and have historically been recorded as a period expense, and 3) forgivable loans to independent financial advisors are now amortized over the expected useful lives of their relationship period with the Company's subsidiaries; previously these loans were amortized based on their legal terms.



15

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



Condensed Consolidated Statement of Financial Condition
 
 
 
 
 
 
 
As of September 30, 2018
 
 
 
 
As Reported
 
Balances without the adoption of ASC 606
 
Effects of Change Higher/(Lower)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
262,834

 
$
262,834

 
$

Securities owned, at fair value
 
5,451

 
5,451

 

Receivables from clearing brokers
 
26,650

 
26,650

 

Receivables from other broker-dealers
 
1,472

 
1,472

 

Notes receivable from financial advisors, net
 
6,520

 
57,983

 
(51,463
)
Other receivables, net
 
130,507

 
69,161

 
61,346

Fixed assets, net
 
28,590

 
28,590

 

Restricted assets
 
6,589

 
6,589

 

Intangible assets, net
 
74,233

 
93,937

 
(19,704
)
Goodwill
 
125,966

 
125,966

 

Contract acquisition costs, net
 
77,803

 

 
77,803

Cash surrender value of life insurance
 
13,478

 
13,478

 

Other assets
 
40,498

 
39,976

 
522

Total assets
 
$
800,591

 
$
732,087

 
$
68,504

 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold, but not yet purchased, at market value
 
$
66

 
$
66

 
$

Accrued compensation
 
32,013

 
32,115

 
(102
)
Commissions and fees payable
 
109,247

 
78,635

 
30,612

Accounts payable and accrued liabilities
 
50,122

 
50,536

 
(414
)
Deferred rent
 
2,970

 
2,970

 

Deferred income taxes
 
12,659

 
6,549

 
6,110

Deferred compensation liability
 
21,963

 
21,963

 

Accrued interest
 

 

 

Notes payable
 
185,199

 
185,199

 

Total liabilities
 
$
414,239

 
$
378,033

 
$
36,206

 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
Preferred stock
 
2

 
2

 

Common stock
 
20

 
20

 

Additional paid-in capital
 
487,752

 
487,752

 

Accumulated deficit
 
(101,467
)
 
(133,754
)
 
32,287

 
 
 
 
 
 
 
Total shareholders' equity of the Company
 
386,307

 
354,020

 
32,287

 
 
 
 
 
 
 
Noncontrolling interest
 
45

 
34

 
11

 
 
 
 
 
 
 
Total shareholders' equity
 
386,352

 
354,054

 
32,298

 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
800,591

 
$
732,087

 
$
68,504








16

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



Condensed Consolidated Statement of Operations
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
As Reported
 
Amounts without the adoption of ASC 606
 
Effects of Change Higher/(Lower)
Revenues:
 
 
 
 
 
 
Commissions
 
$
172,108

 
$
152,795

 
$
19,313

Advisory fees
 
124,550

 
176,889

 
(52,339
)
Investment banking
 
9,982

 
9,374

 
608

Principal transactions
 
45

 
(145
)
 
190

Interest and dividends
 
1,434

 
1,434

 

Service fees
 
28,702

 
28,702

 

Other income
 
12,054

 
12,054

 

Total revenues
 
348,875

 
381,103

 
(32,228
)
Expenses:
 
 
 

 
 
Commissions and fees
 
249,672

 
283,056

 
(33,384
)
Compensation and benefits
 
44,905

 
45,348

 
(443
)
Non-cash compensation
 
1,380

 
1,380

 

Brokerage, communication and clearance fees
 
3,734

 
3,646

 
88

Rent and occupancy, net of sublease revenue
 
2,566

 
2,566

 

Professional services
 
4,531

 
4,045

 
486

Interest
 
3,206

 
3,204

 
2

Depreciation and amortization
 
5,845

 
7,159

 
(1,314
)
Acquisition-related expenses
 

 

 

Amortization of retention and forgivable loans
 
97

 
3,595

 
(3,498
)
Amortization of contract acquisition costs
 
2,488

 

 
2,488

Other
 
17,740

 
17,769

 
(29
)
Total expenses
 
336,164

 
371,768

 
(35,604
)
Income before item shown below
 
12,711

 
9,335

 
3,376

Change in fair value of contingent consideration
 
(54
)
 
(54
)
 

Income before income taxes
 
12,657

 
9,281

 
3,376

Income tax expense
 
3,207

 
2,335

 
872

Net income
 
9,450

 
6,946

 
2,504

Net income attributable to noncontrolling interest
 
13

 
13

 

Net income attributable to the Company
 
$
9,437

 
$
6,933

 
$
2,504

Dividends declared on preferred stock
 
(8,507
)

(8,507
)
 

Net income (loss) available to common shareholders
 
$
930


$
(1,574
)
 
$
2,504

 
 
 
 
 
 
 
Net income (loss) per common share available to common shareholders (basic)
 
$
0.00


$
(0.01
)
 
$
0.01

Net income (loss) per common share available to common shareholders (diluted)
 
$
0.00


$
(0.01
)
 
$
0.01

Weighted average common shares used in computation of per share data:
 
 
 
 
 
 
Basic
 
196,381,910


196,381,910

 

Diluted
 
208,387,236


196,381,910

 
12,005,326



17

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)



Condensed Consolidated Statement of Operations
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
As Reported
 
Amounts without the adoption of ASC 606
 
Effects of Change Higher/(Lower)
Revenues:
 
 
 
 
 
 
Commissions
 
$
515,775

 
$
456,409

 
$
59,366

Advisory fees
 
361,571

 
514,704

 
(153,133
)
Investment banking
 
38,201

 
34,999

 
3,202

Principal transactions
 
445

 
337

 
108

Interest and dividends
 
3,301

 
3,295

 
6

Service fees
 
81,189

 
81,189

 

Other income
 
35,533

 
35,627

 
(94
)
Total revenues
 
1,036,015

 
1,126,560

 
(90,545
)
Expenses:
 
 
 

 

Commissions and fees
 
735,388

 
830,792

 
(95,404
)
Compensation and benefits
 
140,727

 
141,735

 
(1,008
)
Non-cash compensation
 
4,442

 
4,442

 

Brokerage, communication and clearance fees
 
11,994

 
11,535

 
459

Rent and occupancy, net of sublease revenue
 
7,446

 
7,446

 

Professional services
 
14,860

 
13,341

 
1,519

Interest
 
7,226

 
7,212

 
14

Depreciation and amortization
 
17,416

 
21,357

 
(3,941
)
Acquisition-related expenses
 
913

 
913

 

Amortization of retention and forgivable loans
 
280

 
10,195

 
(9,915
)
Amortization of contract acquisition costs
 
7,059

 

 
7,059

Other
 
53,922

 
54,084

 
(162
)
Total expenses
 
1,001,673

 
1,103,052

 
(101,379
)
Income before item shown below
 
34,342

 
23,508

 
10,834

Change in fair value of contingent consideration
 
(165
)
 
(165
)
 

Income before income taxes
 
34,177

 
23,343

 
10,834

Income tax expense
 
9,953

 
7,295

 
2,658

Net income
 
24,224

 
16,048

 
8,176

Net income attributable to noncontrolling interest
 
22

 
22

 

Net income attributable to the Company
 
$
24,202

 
$
16,026

 
$
8,176

Dividends declared on preferred stock
 
(25,523
)
 
(25,523
)
 

Net loss available to common shareholders
 
$
(1,321
)
 
$
(9,497
)
 
$
8,176

 
 
 
 

 

Net loss per common share available to common shareholders (basic)
 
$
(0.01
)
 
$
(0.05
)
 
$
0.04

Net loss per common share available to common shareholders (diluted)
 
$
(0.01
)
 
$
(0.05
)
 
$
0.04

Weighted average common shares used in computation of per share data:
 
 
 
 
 
 
Basic
 
196,281,283

 
196,281,283

 

Diluted
 
196,281,283

 
196,281,283

 



18

LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)




4. Fair Value of Assets and Liabilities

Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market or income approach are used to measure fair value.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3 — Unobservable inputs which reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
The following tables present the carrying values and estimated fair values at September 30, 2018 and December 31, 2017 of financial assets and liabilities, excluding financial instruments that are carried at fair value on a recurring basis, and information is provided on their classification within the fair value hierarchy. Such instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk.
 
 
 
September 30, 2018
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$