Quarterly report pursuant to Section 13 or 15(d)

Revenue from Contracts with Customers

Revenue from Contracts with Customers

9 Months Ended

Sep. 30, 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 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.

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.

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 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, 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.

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.

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 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.



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



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



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			—