Annual report pursuant to Section 13 and 15(d)

Revenue from Contracts with Customers

Revenue from Contracts with Customers

12 Months Ended

Dec. 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. 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. 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. Previously, the Company recognized trailing commissions as payment was received. 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. Previously, the Company presented revenue on a gross or net basis depending on how payment 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 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. 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 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 product sponsors, primarily mutual fund and annuity companies, for marketing support and sales force education and training efforts. Compensation for these performance obligations is generally calculated as a fixed fee, or as a percentage of the average annual amount of product sponsor assets held in advisors' clients' accounts, or 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, this revenue includes variable consideration and is 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 hosts 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:



For the Twelve Months Ended December 31, 2018	Independent Advisory and Brokerage Services		Ladenburg			Insurance Brokerage		Corporate			Total
Commissions	$	540,523	$	11,468		$	144,340	$	—		$	696,331
Advisory fees	467,044		7,170			—		209			474,423
Investment banking	947		56,163			—		(854		)	56,256
Principal transactions	22		(524		)	—		174			(328		)
Interest and dividends	2,566		839			—		1,566			4,971
Service fees	116,047		2,495			—		888			119,430
Other income	33,894		483			2,787		2,889			40,053
Total revenues	$	1,161,043	$	78,094		$	147,127	$	4,872		$	1,391,136

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 consolidated statements of financial condition:



	As of December 31, 2018		As of January 1, 2018 ( Adoption Date)
Contract assets - Insurance trailing commissions	$	64,300	$	58,786
Contract liabilities - Insurance trailing commissions	31,854		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.

Increases to the contract asset were a result of $28,640 in estimated trailing commissions from new policies during the year ended December 31, 2018, respectively, while decreases were driven by $23,126 in actual commissions received during the period ended December 31, 2018, respectively. Increases to the contract liability were a result of $14,320 in estimated commission expense from new policies during the period ended December 31, 2018, respectively, while decreases were driven by $11,861 in actual commissions paid during the period ended December 31, 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 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, 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 $80,726 as of December 31, 2018, an increase of $19,386 compared to the adoption date of January 1, 2018. Amortization on these contract acquisition costs was $9,671 during the twelve months ended December 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.The Company 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.The Company 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.The Company 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.The Company 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 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 consolidated statements of financial position. Previously, forgivable loans were amortized based on their legal terms, typically forgiven over periods ranging from 3 to 5 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 undiscounted sum of expected future renewal commissions to be received from the insurance carriers. 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.

During the fourth quarter of 2018, the Company determined that the deferred tax liability recorded on adoption of ASC606

with respect to Highland was overstated, and the Company made an additional retained earnings adjustment of $665 to correct this item.



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			1,462			1,480			5,938
Deferred compensation liability	18,161			—			—			—			18,161
Accrued interest	232			—			—			—			232
Notes payable	96,849			—			—			—			96,849
Total liabilities	$	261,634		$	(186	)	$	30,857		$	347		$	292,652
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			4,284			20,416			(125,004		)
Total shareholders' equity of the Company	370,379			74			4,284			20,416			395,153
Noncontrolling interest	12			—			—			11			23
Total shareholders' equity	370,391			74			4,284			20,427			395,176
Total liabilities and shareholders' equity	$	632,025		$	(112	)	$	35,141		$	20,774		$	687,828

Impacts on Financial Statements at December 31, 2018

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

During the twelve months ended December 31, 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.



Consolidated Statement of Financial Condition
	As of December 31, 2018
	As Reported			Balances without the adoption of ASC 606			Effects of Change Higher/(Lower)
ASSETS

Cash and cash equivalents	$	182,693		$	182,693		$	—
Securities owned, at fair value	10,923			10,923			—
Receivables from clearing brokers	24,068			24,068			—
Receivables from other broker-dealers	7,078			7,078			—
Notes receivable from financial advisors, net	5,809			57,417			(51,608		)
Other receivables, net	133,242			69,209			64,033
Fixed assets, net	29,994			29,994			—
Restricted assets	6,588			6,588			—
Intangible assets, net	73,064			91,454			(18,390		)
Goodwill	126,079			126,079			—
Contract acquisition costs, net	80,726			—			80,726
Cash surrender value of life insurance	11,406			11,406			—
Income taxes receivable	2,156			—			2,156
Other assets	47,078			46,578			500
Total assets	$	740,904		$	663,487		$	77,417

LIABILITIES AND SHAREHOLDERS' EQUITY

Securities sold, but not yet purchased, at market value	$	2,575		$	2,575		$	—
Accrued compensation	39,192			39,257			(65		)
Commissions and fees payable	105,306			73,452			31,854
Accounts payable and accrued liabilities	48,813			41,026			7,787
Deferred rent	2,956			2,956			—
Deferred income taxes	14,068			9,742			4,326
Deferred compensation liability	20,622			20,622			—
Accrued interest	123			123			—
Notes payable	254,072			254,072			—
Total liabilities	$	487,727		$	443,825		$	43,902

Commitments and contingencies
Shareholders' equity:
Preferred stock	2			2			—
Common stock	14			14			—
Additional paid-in capital	344,356			344,356			—
Accumulated deficit	(91,246		)	(124,750		)	33,504

Total shareholders' equity of the Company	253,126			219,622			33,504

Noncontrolling interest	51			40			11

Total shareholders' equity	253,177			219,662			33,515

Total liabilities and shareholders' equity	$	740,904		$	663,487		$	77,417



Consolidated Statement of Operations

	Twelve Months Ended December 31, 2018
	As Reported			Amounts without the adoption of ASC 606			Effects of Change Higher/(Lower)
Revenues:
Commissions	$	696,331		$	609,400		$	86,931
Advisory fees	474,423			695,094			(220,671		)
Investment banking	56,256			51,335			4,921
Principal transactions	(328		)	(346		)	18
Interest and dividends	4,971			4,964			7
Service fees	119,430			119,430			—
Other income	40,053			40,147			(94		)
Total revenues	1,391,136			1,520,024			(128,888		)
Expenses:
Commissions and fees	976,596			1,113,389			(136,793		)
Compensation and benefits	194,045			195,433			(1,388		)
Non-cash compensation	5,882			5,882			—
Brokerage, communication and clearance fees	16,088			15,525			563
Rent and occupancy, net of sublease revenue	9,977			9,977			—
Professional services	21,927			20,022			1,905
Interest	10,796			10,756			40
Depreciation and amortization	24,039			29,294			(5,255		)
Acquisition-related expenses	1,010			1,010			—
Amortization of retention and forgivable loans	417			13,890			(13,473		)
Amortization of contract acquisition costs	9,671			—			9,671
Other	73,285			73,805			(520		)
Total expenses	1,343,733			1,488,983			(145,250		)
Income before item shown below	47,403			31,041			16,362
Change in fair value of contingent consideration	(238		)	(238		)	—
Income before income taxes	47,165			30,803			16,362
Income tax expense	13,379			5,745			7,634
Net income	33,786			25,058			8,728
Net income attributable to noncontrolling interest	28			28			—
Net income attributable to the Company	$	33,758		$	25,030		$	8,728
Dividends declared on preferred stock	(34,031		)	(34,031		)	—
Net loss available to common shareholders	$	(273	)	$	(9,001	)	$	8,728
Net loss per share available to common shareholders (basic)	$	(0.00	)	$	(0.05	)	$	0.05
Net loss per share available to common shareholders (diluted)	$	(0.00	)	$	(0.05	)	$	0.05
Weighted average common shares used in computation of per share data:
Basic	194,562,916			194,562,916			—
Diluted	194,562,916			194,562,916			—