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, 2019
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)
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 $.0001 per share | LTS | NYSE American |
8.00% Series A Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share | LTS PrA | NYSE American |
6.50% Senior Notes due 2027 | LTSL | NYSE American |
7% Senior Notes due 2028 | LTSF | NYSE American |
7.25% Senior Notes due 2028 | LTSK | NYSE American |
7.75% Senior Notes due 2029 | LTSH | NYSE American |
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 October 31, 2019 there were 148,744,079 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, 2019
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION | |
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PART II. OTHER INFORMATION | |
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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, 2019 (Unaudited) | | December 31, 2018 |
ASSETS | | | |
| | | |
Cash and cash equivalents | $ | 251,033 |
| | $ | 182,693 |
|
Securities owned, at fair value | 4,601 |
| | 10,923 |
|
Receivables from clearing brokers | 27,835 |
| | 24,068 |
|
Receivables from other broker-dealers | 5,597 |
| | 7,078 |
|
Notes receivable from financial advisors, net | 7,459 |
| | 5,809 |
|
Other receivables, net | 67,419 |
| | 68,942 |
|
Insurance trailing commissions receivable | 67,290 |
| | 64,300 |
|
Fixed assets, net | 32,068 |
| | 29,994 |
|
Right-of-use assets | 31,815 |
| | — |
|
Restricted cash | 771 |
| | 6,588 |
|
Intangible assets, net | 62,896 |
| | 73,064 |
|
Goodwill | 126,079 |
| | 126,079 |
|
Contract acquisition costs, net | 86,520 |
| | 80,726 |
|
Cash surrender value of life insurance | 13,934 |
| | 11,406 |
|
Income taxes receivable | — |
| | 2,156 |
|
Other assets | 32,807 |
| | 47,078 |
|
Total assets | $ | 818,124 |
| | $ | 740,904 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| | | |
LIABILITIES: | | | |
Securities sold, but not yet purchased, at fair value | $ | 35 |
| | $ | 2,575 |
|
Accrued compensation | 36,871 |
| | 39,264 |
|
Commissions and fees payable | 106,004 |
| | 105,306 |
|
Accounts payable and accrued liabilities | 37,197 |
| | 48,741 |
|
Deferred rent | — |
| | 2,956 |
|
Lease liabilities | 34,798 |
| | — |
|
Deferred income taxes | 13,945 |
| | 14,068 |
|
Deferred compensation liability | 24,602 |
| | 20,622 |
|
Accrued interest | — |
| | 123 |
|
Notes payable, net of unamortized discount of $5,881 and $6,372 in 2019 and 2018, respectively and net of debt issuance costs of $8,660 and $7,086 in 2019 and 2018, respectively. | 315,898 |
| | 254,072 |
|
Total liabilities | 569,350 |
| | 487,727 |
|
Commitments and contingencies (Note 10) |
|
| |
|
|
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 2019 and 2018; shares issued and outstanding 17,401,282 in 2019 and 17,012,075 in 2018 (liquidation preference $435,032 and $425,302 in 2019 and 2018, respectively) | 2 |
| | 2 |
|
Common stock, $.0001 par value; authorized 1,000,000,000 shares in 2019 and 2018; shares issued and outstanding, 148,710,781 in 2019 and 146,535,796 in 2018 | 15 |
| | 14 |
|
Additional paid-in capital | 317,735 |
| | 344,356 |
|
Accumulated deficit | (68,971 | ) | | (91,246 | ) |
Total shareholders’ equity of the Company | 248,781 |
| | 253,126 |
|
Noncontrolling interest | (7 | ) | | 51 |
|
Total shareholders' equity | 248,774 |
| | 253,177 |
|
Total liabilities and shareholders' equity | $ | 818,124 |
| | $ | 740,904 |
|
See accompanying notes.
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, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Revenues: | | | | | | | | |
Commissions | | $ | 180,395 |
| | $ | 172,108 |
| | $ | 527,076 |
| | $ | 515,775 |
|
Advisory fees | | 132,763 |
| | 124,550 |
| | 372,664 |
| | 361,571 |
|
Investment banking | | 18,692 |
| | 9,982 |
| | 40,060 |
| | 38,201 |
|
Principal transactions | | (258 | ) | | 45 |
| | 1,271 |
| | 445 |
|
Interest and dividends | | 1,474 |
| | 1,434 |
| | 4,018 |
| | 3,301 |
|
Service fees | | 31,137 |
| | 28,702 |
| | 95,727 |
| | 81,189 |
|
Other income | | 10,329 |
| | 12,054 |
| | 32,751 |
| | 35,533 |
|
Total revenues | | 374,532 |
| | 348,875 |
| | 1,073,567 |
| | 1,036,015 |
|
Expenses: | | | | | |
| |
|
Commissions and fees | | 260,072 |
| | 249,672 |
| | 749,522 |
| | 735,388 |
|
Compensation and benefits | | 54,026 |
| | 44,905 |
| | 154,514 |
| | 140,727 |
|
Non-cash compensation | | 1,536 |
| | 1,380 |
| | 4,474 |
| | 4,442 |
|
Brokerage, communication and clearance fees | | 3,392 |
| | 3,734 |
| | 10,956 |
| | 11,994 |
|
Rent and occupancy, net of sublease revenue | | 2,648 |
| | 2,566 |
| | 7,962 |
| | 7,446 |
|
Professional services | | 4,810 |
| | 4,531 |
| | 14,514 |
| | 14,860 |
|
Interest | | 6,218 |
| | 3,206 |
| | 16,840 |
| | 7,226 |
|
Depreciation and amortization | | 5,246 |
| | 5,845 |
| | 17,057 |
| | 17,416 |
|
Acquisition-related expenses | | — |
| | — |
| | 24 |
| | 913 |
|
Amortization of retention and forgivable loans | | 139 |
| | 97 |
| | 391 |
| | 280 |
|
Amortization of contract acquisition costs | | 2,988 |
| | 2,488 |
| | 8,639 |
| | 7,059 |
|
Other | | 18,067 |
| | 17,740 |
| | 58,746 |
| | 53,922 |
|
Total expenses | | 359,142 |
| | 336,164 |
| | 1,043,639 |
| | 1,001,673 |
|
Income before item shown below | | 15,390 |
| | 12,711 |
| | 29,928 |
| | 34,342 |
|
Change in fair value of contingent consideration | | (93 | ) | | (54 | ) | | (290 | ) | | (165 | ) |
Income before income taxes | | 15,297 |
| | 12,657 |
| | 29,638 |
| | 34,177 |
|
Income tax expense | | 4,020 |
| | 3,207 |
| | 7,421 |
| | 9,953 |
|
Net income | | 11,277 |
| | 9,450 |
| | 22,217 |
| | 24,224 |
|
Net (loss) income attributable to noncontrolling interest | | (79 | ) | | 13 |
| | (58 | ) | | 22 |
|
Net income attributable to the Company | | $ | 11,356 |
| | $ | 9,437 |
| | $ | 22,275 |
| | $ | 24,202 |
|
Dividends declared on preferred stock | | (8,702 | ) | | (8,507 | ) | | (25,987 | ) | | (25,523 | ) |
Net income (loss) available to common shareholders | | $ | 2,654 |
| | $ | 930 |
| | $ | (3,712 | ) | | $ | (1,321 | ) |
| | | | | | | | |
Net income (loss) per common share available to common shareholders (basic) | | $ | 0.02 |
| | $ | 0.00 |
| | $ | (0.03 | ) | | $ | (0.01 | ) |
| | | | | | | | |
Net income (loss) per common share available to common shareholders (diluted) | | $ | 0.02 |
| | $ | 0.00 |
| | $ | (0.03 | ) | | $ | (0.01 | ) |
| | | | | | | | |
Weighted average common shares used in computation of per share data: | | | | | | | | |
Basic | | 143,092,912 |
| | 196,381,910 |
| | 143,281,873 |
| | 196,281,283 |
|
Diluted | | 147,960,009 |
| | 208,387,236 |
| | 143,281,873 |
| | 196,281,283 |
|
See accompanying notes.
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 - June 30, 2018 | 17,012,075 |
| | $ | 2 |
| | 201,271,034 |
| | $ | 20 |
| | $ | 501,348 |
| | $ | (110,239 | ) | | $ | 32 |
| | $ | 391,163 |
|
Issuance of common stock under employee stock purchase plan | — |
| | — |
| | 32,891 |
| | — |
| | 84 |
| | — |
| | — |
| | 84 |
|
Exercise of stock options | — |
| | — |
| | 778,234 |
| | — |
| | 1,304 |
| | — |
| | — |
| | 1,304 |
|
Stock-based compensation granted to advisory board, consultants and independent financial advisors | — |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
Stock-based compensation to employees | — |
| | — |
| | — |
| | — |
| | 1,373 |
| | — |
| | — |
| | 1,373 |
|
Unvested restricted stock forfeitures | — |
| | — |
| | (106,250 | ) | | — |
| | — |
| | — |
| | — |
| — |
| — |
|
Repurchase and retirement of common stock | — |
| | — |
| | (1,724,113 | ) | | — |
| | (5,318 | ) | | — |
| | — |
| | (5,318 | ) |
Preferred stock issued, net of underwriting discount and expense of $91 | — |
| | — |
| | — |
| | — |
| | (91 | ) | | — |
| | — |
| | (91 | ) |
Preferred stock dividends declared and paid | — |
| | — |
| | — |
| | — |
| | (8,507 | ) | | — |
| | — |
| | (8,507 | ) |
Common stock dividends declared and paid | — |
| | — |
| | — |
| | — |
| | (2,448 | ) | | — |
| | — |
| | (2,448 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 9,437 |
| | 13 |
| | 9,450 |
|
Balance - September 30, 2018 | 17,012,075 |
| | $ | 2 |
| | 200,251,796 |
| | $ | 20 |
| | $ | 487,752 |
| | $ | (100,802 | ) | | $ | 45 |
| | $ | 387,017 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance - June 30, 2019 | 17,401,282 |
| | $ | 2 |
| | 148,501,131 |
| | $ | 15 |
| | $ | 326,928 |
| | $ | (80,327 | ) | | $ | 72 |
| | $ | 246,690 |
|
Issuance of common stock under employee stock purchase plan | — |
| | — |
| | 40,869 |
| | — |
| | 92 |
| | — |
| | — |
| | 92 |
|
Exercise of stock options, net of 120,129 shares tendered in payment of exercise price | — |
| | — |
| | 324,352 |
| | — |
| | 218 |
| | — |
| | — |
| | 218 |
|
Stock-based compensation to employees | — |
| | — |
| | — |
| | — |
| | 1,536 |
| | — |
| | — |
| | 1,536 |
|
Repurchase and retirement of common stock | — |
| | — |
| | (155,571 | ) | | — |
| | (526 | ) | | — |
| | — |
| | (526 | ) |
Preferred stock issued, net of underwriting discount and expense of $18 | — |
| | — |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | (18 | ) |
Preferred stock dividends declared and paid | — |
| | — |
| | — |
| | — |
| | (8,702 | ) | | — |
| | — |
| | (8,702 | ) |
Common stock dividends declared and paid | — |
| | — |
| | — |
| | — |
| | (1,793 | ) | | — |
| | — |
| | (1,793 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 11,356 |
| | (79 | ) | | 11,277 |
|
Balance - September 30, 2019 | 17,401,282 |
| | $ | 2 |
| | 148,710,781 |
| | $ | 15 |
| | $ | 317,735 |
| | $ | (68,971 | ) | | $ | (7 | ) | | $ | 248,774 |
|
See accompanying notes.
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 2) | | — |
| | — |
| | — |
| | — |
| | — |
| | 24,774 |
| | 11 |
|
| 24,785 |
|
Balance - January 1, 2018 | | 17,012,075 |
| | 2 |
| | 198,583,941 |
| | 20 |
| | 520,135 |
| | (125,004 | ) | | 23 |
| | 395,176 |
|
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 |
| | $ | (100,802 | ) | | $ | 45 |
| | $ | 387,017 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance - December 31, 2018 | | 17,012,075 |
| | $ | 2 |
| | 146,535,796 |
| | $ | 14 |
| | $ | 344,356 |
| | $ | (91,246 | ) | | $ | 51 |
| | $ | 253,177 |
|
Issuance of common stock under employee stock purchase plan | | — |
| | — |
| | 127,507 |
| | — |
| | 342 |
| | — |
| | — |
| | 342 |
|
Exercise of stock options, net of 663,979 shares tendered in payment of exercise price | | — |
| | — |
| | 2,529,429 |
| | — |
| | 1,372 |
| | — |
| | — |
| | 1,372 |
|
Stock-based compensation granted to consultants and independent financial advisors | | — |
| | — |
| | — |
| | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
Stock-based compensation to employees | | — |
| | — |
| | — |
| | — |
| | 4,459 |
| | — |
| | — |
| | 4,459 |
|
Issuance of restricted stock | | — |
| | — |
| | 2,785,000 |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Unvested restricted stock forfeitures | | — |
| | — |
| | (82,500 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Repurchase and retirement of common stock, including 1,002,460 shares surrendered for tax withholdings and 12,673 shares tendered in exercise of options | | — |
| | — |
| | (3,184,451 | ) | | — |
| | (10,873 | ) | | — |
| | — |
| | (10,873 | ) |
Preferred stock issued, net of underwriting discount and expense of $1 | | 389,207 |
| | — |
| | — |
| | — |
| | 9,431 |
| | — |
| | — |
| | 9,431 |
|
Preferred stock dividends declared and paid | | — |
| | — |
| | — |
| | — |
| | (25,987 | ) | | — |
| | — |
| | (25,987 | ) |
Common stock dividends declared and paid | | — |
| | — |
| | — |
| | — |
| | (5,380 | ) | | — |
| | — |
| | (5,380 | ) |
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 22,275 |
| | (58 | ) | | 22,217 |
|
Balance - September 30, 2019 | | 17,401,282 |
| | $ | 2 |
| | 148,710,781 |
| | $ | 15 |
| | $ | 317,735 |
| | $ | (68,971 | ) | | $ | (7 | ) | | $ | 248,774 |
|
See accompanying notes.
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
| | | |
Cash flows from operating activities: | | | |
Net income | $ | 22,217 |
| | $ | 24,224 |
|
Adjustments to reconcile net income to | | | |
net cash provided by operating activities: | | | |
Change in fair value of contingent consideration | 290 |
| | 165 |
|
Adjustment to deferred rent | — |
| | 819 |
|
Amortization of right-of-use assets | 5,717 |
| | — |
|
Amortization of intangible assets | 10,173 |
| | 11,552 |
|
Amortization of debt discount | 491 |
| | 428 |
|
Amortization of debt issue cost | 636 |
| | 401 |
|
Amortization of retention and forgivable loans | 391 |
| | 280 |
|
Amortization of contract acquisition costs | 8,639 |
| | 7,059 |
|
Depreciation and other amortization | 6,884 |
| | 5,864 |
|
Deferred income taxes | (123 | ) | | 6,056 |
|
Non-cash compensation expense | 4,474 |
| | 4,442 |
|
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 | 4 |
| | 18 |
|
| | | |
(Increase) decrease in operating assets | | | |
Securities owned, at fair value | 6,322 |
| | (1,570 | ) |
Receivables from clearing brokers | (3,767 | ) | | 21,893 |
|
Receivables from other broker-dealers | 1,481 |
| | 1,350 |
|
Other receivables, net | 1,523 |
| | (11,151 | ) |
Insurance trailing commissions receivable | (2,990 | ) | | — |
|
Contract acquisition costs, net | (14,433 | ) | | (23,522 | ) |
Notes receivable from financial advisors, net | (2,041 | ) | | 3 |
|
Cash surrender value of life insurance | (2,528 | ) | | (767 | ) |
Income taxes receivable | 2,156 |
| | — |
|
Other assets | 14,271 |
| | (8,786 | ) |
| | | |
Increase (decrease) in operating liabilities | | | |
Securities sold, but not yet purchased, at fair value | (2,540 | ) | | (165 | ) |
Accrued compensation | (2,393 | ) | | (1,220 | ) |
Accrued interest | (123 | ) | | (153 | ) |
Commissions and fees payable | 698 |
| | 12,631 |
|
Deferred compensation liability | 3,980 |
| | 3,802 |
|
Lease liabilities | (5,787 | ) | | — |
|
Accounts payable and accrued liabilities | (11,655 | ) | | 9,932 |
|
Net cash provided by operating activities | 41,967 |
| | 61,363 |
|
| | | |
Cash flows from investing activities: | | | |
Purchases of fixed assets | (9,044 | ) | | (10,503 | ) |
Purchase of intangible assets | (5 | ) | | (6 | ) |
Acquisition of certain assets of Kestler Financial Group | — |
| | (1,683 | ) |
Net cash used in investing activities | (9,049 | ) | | (12,192 | ) |
| | | |
Cash flows from financing activities: | | | |
Issuance of Series A preferred stock | 9,431 |
| | (180 | ) |
Issuance of common stock | 1,715 |
| | 4,001 |
|
Issuance of senior notes | 55,291 |
| | 106,081 |
|
Series A preferred stock dividends paid | (25,987 | ) | | (25,523 | ) |
Common stock dividends paid | (5,380 | ) | | (6,377 | ) |
Repurchase and retirement of common stock | (10,873 | ) | | (8,746 | ) |
Borrowings on term loan | 7,000 |
| | — |
|
Bank loan and revolver repayments | (1,361 | ) | | (6,658 | ) |
Principal payments on notes payable | (231 | ) | | (15,209 | ) |
Net cash provided by financing activities | 29,605 |
| | 47,389 |
|
Net increase in cash and cash equivalents | 62,523 |
| | 96,560 |
|
Cash and cash equivalents including restricted cash, beginning of period | 189,281 |
| | 172,863 |
|
Cash and equivalents at end of period: | | | |
Cash and cash equivalents | 251,033 |
| | 262,834 |
|
Restricted cash | 771 |
| | 6,589 |
|
Cash and cash equivalents including restricted cash, end of period | $ | 251,804 |
| | $ | 269,423 |
|
| | | |
Supplemental cash flow information: | | | |
Interest paid | $ | 15,836 |
| | $ | 6,551 |
|
Taxes paid | 1,940 |
| | 2,786 |
|
| | | |
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.
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, Triad Advisors (‘‘Triad’’), Investacorp, KMS Financial Services (“KMS”), Securities Service Network (“SSN”), Ladenburg Thalmann & Co. (‘‘Ladenburg’’), Ladenburg Thalmann Asset Management (‘‘LTAM’’), Premier Trust (‘‘Premier Trust’’) and Highland Capital Brokerage (“Highland”).
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. Highland also 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 is 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, 2018 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, 2018 for additional disclosures and a description of accounting policies.
Certain amounts in the prior period financial statements were reclassified to conform with the current period financial statement presentation.
New Accounting Standards Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 Company adopted the provisions of Topic 842 on January 1, 2019, using the modified retrospective approach and the option presented under ASU 2018-11 to transition only active leases as of January 1, 2019. All comparative periods prior to January 1, 2019 are not adjusted and continue to be reported in accordance with Topic 840.
The Company elected to utilize the transition package of practical expedients permitted within the new standard, which among other things, allowed the Company to carryforward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the Company’s Consolidated Statements of Financial Condition which resulted in recognizing those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. The Company did not elect the hindsight practical expedient when determining the lease terms.
Adoption of the new standard resulted in the recording of right-of-use assets and corresponding lease liabilities of $36,522 and $39,483, respectively, as of January 1, 2019. The difference between the right-of-use assets and the lease liabilities was recorded to eliminate existing deferred rent balances recorded under Topic 840. The adoption of the new standard did not materially impact the Company's Consolidated Statements of Operations and had no impact on the Company's Consolidated Statements of Cash Flows. The Company's current lease arrangements expire through 2030. See Note 4 for further information.
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 adoption of ASU 2018-07 was effective January 1, 2019 and did not have any impact on the consolidated financial statements.
Accounting Standards Issued, But Not Yet Effective
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 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.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
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. Revenue from Contracts with Customers
The Company adopted ASU 2014-09 and all related amendments ("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 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. During the fourth quarter of 2018, the Company determined that the deferred tax liability recorded on adoption of ASC 606 with respect to Highland was overstated, and the Company made an additional retained earnings adjustment of $665 to correct this item as of January 1, 2018.
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. Revenues are also analyzed to determine whether the Company acts as the principal (i.e. reports revenue on a gross basis) or agent (i.e. reports revenue on a net basis) in the arrangement with the customer. Principal or agent designations depend primarily on the control an entity has over the product or service before control is transferred to a customer. The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred and discretion in establishing the price.
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 trailing commissions which are variable. Commissions revenue is recognized at the point of sale on the 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. For trailing commissions, the performance obligation is satisfied at the time of the execution of the investments but the amount to be received for trailing commissions is uncertain, as it is dependent on the value of the investments at future points in time as well as the length of time the investor holds the investments, both of which are highly susceptible to variable factors outside the Company's influence. The Company does not believe that it can overcome this constraint until the market value of the investment and the investor activities are known, which are usually monthly or quarterly. The Company's Consolidated Statements of Operations reflects trailing commissions for services performed and performance obligations satisfied in previous periods and are recognized in the period that the constraint is overcome, when clients' investment holdings and their market values become known.
The Company's broker-dealer subsidiaries act as principal in satisfying the performance obligations that generate commissions revenue and maintain relationships with the product sponsors.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
The Company's independent financial advisors assist the Company in performing its obligations. Accordingly, broker-dealer commissions revenue are presented on a gross basis.
Insurance Commissions
The Company’s performance obligation with respect to each contract with its customer, the insurance carriers, is the sale of the insurance policies to clients. Insurance commissions revenue is received from insurance carriers and 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.
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 undiscounted sum of expected future renewal commissions to be received from the insurance carriers.
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. The Company also estimates a reduction of the transaction price for possible future chargebacks from the carriers. The Company acts as principal in its relationship with the insurance carriers and receives commissions revenue for the sale of insurance products for the insurance carriers. The Company's financial advisors assist the Company in performing its obligations and act as an agent for the Company. Accordingly, the Company presents the first-year and trailing commissions revenue on a gross basis when each policy is bound as an enforceable contract.
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 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 consolidated statements of operations. Accordingly, 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 are 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 recognizes its share of revenue and expenses on a gross basis, because Ladenburg is acting as the principal.
Strategic Advisory Services
Performance obligations in these arrangements vary dependent on the contract, but are typically satisfied upon
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
completion of the arrangement. Transaction fees may include retainer, management, and/or success fees, which are recognized upon completion of a deal. 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.
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.
Service Fees
Service fees primarily include (1) amounts charged to independent financial advisors for securities trades and for providing administrative and compliance services; and (2) fees earned for arranging the cash sweep programs between the customers and the third-party banks, in which customers' cash deposits in their brokerage accounts at the customers' direction are swept into interest-bearing FDIC-insured deposit accounts at various third-party banks.
The service fees charged to independent financial advisors are recognized when the Company satisfies its performance obligations. Transaction revenues for the processing of securities trades are recognized at the point-in-time that a transaction is executed, which is generally the trade date. Fees charged to advisors for providing administrative and compliance services are either recognized at a point-in-time to over time depending on whether the service is provided at an identifiable point-in-time or if the service is provided continually over the the year. The cash sweep fees are earned and recognized over the period of the clients' participation in these programs.
Other Income
The Company receives fees from distributors of certain products sold by financial advisors affiliated with the Company's independent advisory and brokerage subsidiaries. These fees are for marketing support and sales force education and training efforts. Compensation for these performance obligations is generally calculated as a fixed fee, as a percentage of the average annual amount of product sponsor assets held in advisors' clients' accounts, as a percentage of new sales, or a combination. As the value of product sponsor assets held in advisor's clients' accounts is susceptible to unpredictable market changes, fees based on asset levels or sales include variable consideration and are constrained until the date that the fees are determinable. The Company is the principal in these arrangements as it is responsible for and determines the level of servicing and marketing support it provides to the product sponsors.
In addition, the Company's independent advisory and brokerage subsidiaries host certain advisor conferences that serve as training, education, sales, and marketing events, for which a fee may be charged for attendance to advisors and product sponsors. Recognition is at a point-in-time when the conference is held and the Company satisfies its performance obligations.
Disaggregation of Revenue
In the following table, revenue is disaggregated by service line and segment:
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | | |
For the Three Months Ended September 30, 2019 | | Independent Advisory and Brokerage Services | | Ladenburg | | Insurance Brokerage | | Corporate | | Total |
Commissions | | $ | 133,904 |
| | $ | 2,087 |
| | $ | 44,404 |
| | $ | — |
| | $ | 180,395 |
|
Advisory fees | | 130,464 |
| | 2,299 |
| | — |
| | — |
| | 132,763 |
|
Investment banking | | 238 |
| | 18,454 |
| | — |
| | — |
| | 18,692 |
|
Principal transactions | | 7 |
| | (237 | ) | | — |
| | (28 | ) | | (258 | ) |
Interest and dividends | | 650 |
| | 263 |
| | — |
| | 561 |
| | 1,474 |
|
Service fees | | 30,318 |
| | 551 |
| | — |
| | 268 |
| | 31,137 |
|
Other income | | 9,623 |
| | 102 |
| | 510 |
| | 94 |
| | 10,329 |
|
Total revenues | | $ | 305,204 |
| | $ | 23,519 |
| | $ | 44,914 |
| | $ | 895 |
| | $ | 374,532 |
|
|
| | | | | | | | | | | | | | | | | | | | |
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 |
|
|
| | | | | | | | | | | | | | | | | | | | |
For the Nine Months Ended September 30, 2019 | | Independent Brokerage and Advisory Services | | Ladenburg | | Insurance Brokerage | | Corporate | | Total |
Commissions | | $ | 396,949 |
| | $ | 7,161 |
| | $ | 122,966 |
| | $ | — |
| | $ | 527,076 |
|
Advisory fees | | 366,916 |
| | 5,748 |
| | — |
| | — |
| | 372,664 |
|
Investment banking | | 584 |
| | 39,476 |
| | — |
| | — |
| | 40,060 |
|
Principal transactions | | 19 |
| | 1,403 |
| | — |
| | (151 | ) | | 1,271 |
|
Interest and dividends | | 1,964 |
| | 789 |
| | — |
| | 1,265 |
| | 4,018 |
|
Service fees | | 93,237 |
| | 1,716 |
| | — |
| | 774 |
| | 95,727 |
|
Other income | | 30,355 |
| | 470 |
| | 1,723 |
| | 203 |
| | 32,751 |
|
Total revenues | | $ | 890,024 |
| | $ | 56,763 |
| | $ | 124,689 |
| | $ | 2,091 |
| | $ | 1,073,567 |
|
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 Brokerage and Advisory 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 insurance trailing commissions receivable, 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, 2019 | As of December 31, 2018 |
Contract assets - Insurance trailing commissions | | $ | 67,290 |
| $ | 64,300 |
|
Contract liabilities - Insurance trailing commissions | | 32,630 |
| 31,854 |
|
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.
Increases to the contract asset were a result of $7,461 and $20,256 in estimated trailing commissions from new policies during the three and nine months ended September 30, 2019, respectively, while decreases were driven by $5,541 and $17,266 in actual commissions received during the three and nine months ended September 30, 2019, respectively. Increases to the contract liability were a result of $3,276 and $9,583 in estimated commission expense from new policies during the three and nine months ended September 30, 2019, respectively, while decreases were driven by $2,812 and $8,807 in actual commissions paid during the three and nine months ended September 30, 2019, respectively.
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 are 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, and thereby bring their customers’ 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 $86,520 as of September 30, 2019, an increase of $5,794 compared to December 31, 2018. Amortization on these contract acquisition costs was $8,639 during the nine months ended September 30, 2019. 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.
3. 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.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
The following tables present the carrying values and estimated fair values at September 30, 2019 and December 31, 2018 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, 2019 |
Assets | | Carrying Value | | Level 1 | | Level 2 | | Total Estimated Fair Value |
Cash and cash equivalents | | $ | 251,033 |
| | $ | 251,033 |
| | $ | — |
| | $ | 251,033 |
|
Receivables from clearing brokers | | 27,835 |
| | — |
| | 27,835 |
| | 27,835 |
|
Receivables from other broker-dealers | | 5,597 |
| | — |
| | 5,597 |
| | 5,597 |
|
Notes receivables, net (1) | | 7,459 |
| | — |
| | 7,459 |
| | 7,459 |
|
Other receivables, net | | 67,419 |
| | — |
| | 67,419 |
| | 67,419 |
|
Insurance trailing commissions receivable | | 67,290 |
| | — |
| | 67,290 |
| | 67,290 |
|
| | $ | 426,633 |
| | $ | 251,033 |
| | $ | 175,600 |
| | $ | 426,633 |
|
| | | | | | | | |
Liabilities | | | | | | | | |
Accrued compensation | | $ | 36,871 |
| | $ | — |
| | $ | 36,871 |
| | $ | 36,871 |
|
Commissions and fees payable | | 106,004 |
| | — |
| | 106,004 |
| | 106,004 |
|
Accounts payable and accrued liabilities (2) | | 34,677 |
| | — |
| | 34,677 |
| | 34,677 |
|
Accrued interest | | — |
| | — |
| | — |
| | — |
|
Notes payable, net (3) | | 315,898 |
| | — |
| | 333,145 |
| | 333,145 |
|
| | $ | 493,450 |
| | $ | — |
| | $ | 510,697 |
| | $ | 510,697 |
|
(1) Carrying value approximates fair value, which is determined based on a valuation technique to convert future cash payments or forgiveness transactions to a single discounted preset value amount.
(2) Excludes contingent consideration liabilities of $2,520.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
Assets | | Carrying Value | | Level 1 | | Level 2 | | Total Estimated Fair Value |
Cash and cash equivalents | | $ | 182,693 |
| | $ | 182,693 |
| | $ | — |
| | $ | 182,693 |
|
Receivables from clearing brokers | | 24,068 |
| | — |
| | 24,068 |
| | 24,068 |
|
Receivables from other broker-dealers | | 7,078 |
| | — |
| | 7,078 |
| | 7,078 |
|
Notes receivables, net (1) | | 5,809 |
| | — |
| | 5,809 |
| | 5,809 |
|
Other receivables, net | | 68,942 |
| | — |
| | 68,942 |
| | 68,942 |
|
Insurance trailing commissions receivable | | 64,300 |
| |
| | 64,300 |
| | 64,300 |
|
| | $ | 352,890 |
| | $ | 182,693 |
| | $ | 170,197 |
| | $ | 352,890 |
|
| |
| |
| |
| |
|
Liabilities | |
| |
| |
| |
|
Accrued compensation | | $ | 39,264 |
| | $ | — |
| | $ | 39,264 |
| | $ | 39,264 |
|
Commissions and fees payable | | 105,306 |
| | — |
| | 105,306 |
| | 105,306 |
|
Accounts payable and accrued liabilities (2) | | 46,511 |
| | — |
| | 46,511 |
| | 46,511 |
|
Accrued interest | | 123 |
| | — |
| | 123 |
| | 123 |
|
Notes payable, net (3) | | 254,072 |
| | — |
| | 266,844 |
| | 266,844 |
|
| | $ | 445,276 |
| | $ | — |
| | $ | 458,048 |
| | $ | 458,048 |
|
(1) Carrying value approximates fair value, which is determined based on a valuation technique to convert future cash payments or forgiveness transactions to a single discounted preset value amount.
(2) Excludes contingent consideration liabilities of $2,230.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.
The following tables present the financial assets and liabilities measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
Assets | | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
Certificates of deposit | | $ | 289 |
| | $ | 289 |
| | $ | — |
| | $ | — |
| | $ | 289 |
|
Debt securities | | 627 |
| | — |
| | 627 |
| | — |
| | 627 |
|
U.S. treasury notes | | 711 |
| | — |
| | 711 |
| | — |
| | 711 |
|
Common stock and warrants | | 2,974 |
| | 326 |
| | 2,648 |
| | — |
| | 2,974 |
|
Total | | $ | 4,601 |
| | $ | 615 |
| | $ | 3,986 |
| | $ | — |
| | $ | 4,601 |
|
| | | | | | | | | | |
Liabilities | | | | | | | | | | |
Contingent consideration payable | | $ | 2,520 |
| | $ | — |
| | $ | — |
| | $ | 2,520 |
| | $ | 2,520 |
|
Debt securities | | 29 |
| | — |
| | 29 |
| | — |
| | 29 |
|
Common stock and warrants | | 6 |
| | 6 |
| | — |
| | — |
| | 6 |
|
Total | | $ | 2,555 |
| | $ | 6 |
| | $ | 29 |
| | $ | 2,520 |
| | $ | 2,555 |
|
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
Assets | | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
Certificates of deposit | | $ | 426 |
| | $ | 426 |
| | $ | — |
| | $ | — |
| | $ | 426 |
|
Debt securities | | 1,447 |
| | — |
| | 1,447 |
| | — |
| | 1,447 |
|
U.S. treasury notes | | 794 |
| | — |
| | 794 |
| | — |
| | 794 |
|
Common stock and warrants | | 8,256 |
| | 7,070 |
| | 1,186 |
| | — |
| | 8,256 |
|
Total | | $ | 10,923 |
| | $ | 7,496 |
| | $ | 3,427 |
| | $ | — |
| | $ | 10,923 |
|
| | | | | | | | | | |
Liabilities | |