Quarterly report pursuant to Section 13 or 15(d)

Revenue from Contracts with Customers

Revenue from Contracts with Customers

3 Months Ended

Mar. 31, 2018

Revenue from Contract with Customer [Abstract]

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. 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. 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, we have generally recognized advisory fee revenue on a gross basis based on the fees charged by the independent financial advisors to their clients. Accordingly, our reported advisory revenue and the independent financial advisors’ compensation in our 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. 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

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 March 31, 2018	Independent Advisory and Brokerage Services		Ladenburg		Insurance Brokerage		Corporate		Total
Commissions	$	129,745	$	3,213	$	30,328	$	—	$	163,286
Advisory fees	112,513		1,816		—		54		114,383
Investment banking	116		16,374		—		—		16,490
Principal transactions	11		156		—		—		167
Interest and dividends	534		75		—		178		787
Service fees	24,140		568		—		194		24,902
Other income	8,470		112		732		55		9,369
Total revenues	$	275,529	$	22,314	$	31,060	$	481	$	329,384

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 position:



	As of March 31, 2018		As of January 1, 2018 (Adoption Date)
Contract assets - Insurance trailing commissions	$	62,178	$	58,786
Contract liabilities - Insurance trailing commissions	32,571		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 in the next twelve-month period which approximate $22,000 in contract assets and $11,000 in contract liabilities.

Increases to the contract asset were a result of $6,406 in estimated trailing commissions from new policies during the three months ended March 31, 2018, while decreases were driven by $3,014 in actual commissions received. Increases to the contract liability were a result of $3,209 in estimated commission expense from new policies during the three months ended March 31, 2018, while decreases were driven by $33 in actual commissions paid.

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 $73,234 as of March 31, 2018, an increase of $11,894 compared to the adoption date of January 1, 2018. Amortization on these contract acquisition costs was $2,210 during the three months ended March 31, 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.

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.



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

Impacts on Financial Statements at March 31, 2018

The following tables compare the reported condensed consolidated statement of financial condition and statement of operations as of and for the three months ending March 31, 2018, to the pro-forma amounts had the previous accounting standards been in effect:



Condensed Consolidated Statement of Financial Condition

	As of March 31, 2018
	As Reported			Balances without the adoption of ASC 606			Effects of Change Higher/(Lower)
ASSETS

Cash and cash equivalents	$	145,417		$	145,417		$	—
Securities owned, at fair value	4,104			4,104			—
Receivables from clearing brokers	55,842			55,842			—
Receivables from other broker-dealers	2,263			2,263			—
Notes receivable from financial advisors, net	6,522			57,038			(50,516		)
Other receivables, net	122,154			60,231			61,923
Fixed assets, net	23,886			23,886			—
Restricted assets	760			760			—
Intangible assets, net	76,131			98,463			(22,332		)
Goodwill	124,210			124,210			—
Contract acquisition costs, net	73,234			—			73,234
Cash surrender value of life insurance	12,691			12,691			—
Other assets	36,941			36,586			355

Total assets	$	684,155		$	621,491		$	62,664

LIABILITIES AND SHAREHOLDERS' EQUITY

Securities sold, but not yet purchased, at market value	$	235		$	235		$	—
Accrued compensation	18,828			18,816			12
Commissions and fees payable	95,937			63,366			32,571
Accounts payable and accrued liabilities	52,205			51,874			331
Deferred rent	2,571			2,571			—
Deferred income taxes	6,532			2,631			3,901
Deferred compensation liability	18,340			18,340			—
Accrued interest	261			261			—
Notes payable	98,997			98,997			—
Total liabilities	$	293,906		$	257,091		$	36,815

Commitments and contingencies
Sharedholders' equity:
Preferred stock	2			2			—
Common stock	20			20			—
Additional paid-in capital	510,409			510,409			—
Accumulated deficit	(120,206		)	(146,044		)	25,838

Total shareholders equity of the Company	390,225			364,387			25,838

Noncontrolling interest	24			13			11

Total shareholders' equity	390,249			364,400			25,849

Total liabilities and shareholders' equity	$	684,155		$	621,491		$	62,664



Condensed Consolidated Statement of Operations

	Three Months Ended March 31, 2018
	As Reported			Amounts without the adoption of ASC 606			Effects of Change Higher/(Lower)
Revenues:
Commissions	$	163,286		$	146,038		$	17,248
Advisory fees	114,383			163,927			(49,544		)
Investment banking	16,490			15,146			1,344
Principal transactions	167			193			(26		)
Interest and dividends	787			781			6
Service fees	24,902			24,902			—
Other income	9,369			9,463			(94		)
Total revenues	329,384			360,450			(31,066		)
Expenses:
Commissions and fees	231,311			263,822			(32,511		)
Compensation and benefits	47,249			47,486			(237		)
Non-cash compensation	1,494			1,494			—
Brokerage, communication and clearance fees	5,319			5,071			248
Rent and occupancy, net of sublease revenue	2,493			2,493			—
Professional services	5,018			4,636			382
Interest	1,866			1,866			—
Depreciation and amortization	5,809			7,123			(1,314		)
Acquisition-related expenses	913			913			—
Amortization of retention and forgivable loans	76			3,156			(3,080		)
Amortization of contract acquisition costs	2,210			—			2,210
Other	17,929			18,071			(142		)
Total expenses	321,687			356,131			(34,444		)
Income before item shown below	7,697			4,319			3,378
Change in fair value of contingent consideration	(61		)	(61		)	—
Income before income taxes	7,636			4,258			3,378
Income tax expense	2,172			521			1,651
Net income	5,464			3,737			1,727
Net income attributable to noncontrolling interest	1			1			—
Net income attributable to the Company	$	5,463		$	3,736		$	1,727
Dividends declared on preferred stock	(8,508		)	(8,508		)	—
Net loss available to common shareholders	$	(3,045	)	$	(4,772	)	$	1,727

Net loss per common share available to common shareholders (basic)	$	(0.02	)	$	(0.02	)	$	—
Net loss per common share available to common shareholders (diluted)	$	(0.02	)	$	(0.02	)	$	—
Weighted average common shares used in computation of per share data:
Basic	195,898,794			195,898,794			—
Diluted	195,898,794			195,898,794			—