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, 2016

OR

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

For the transition period from _____ to ______

Commission File Number 001-15799

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes__X__ No___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
 
 
Accelerated filer
[x]
 
 
 
 
 
 
 
 
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
 
Smaller reporting company
[ ]
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ___ No  X 
    
As of November 3, 2016 there were 193,892,686 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, 2016

TABLE OF CONTENTS

 
 
Page
PART I. FINANCIAL INFORMATION
 
 

 
 
 
 
 
 

 
 
 
 
3

 
 
 
 
4

 
 
 
 
5

 
 
 
 
7

 
 
 
20

 
 
 
35

 
 
 
35

 
 
 
PART  II. OTHER INFORMATION
 
 
 
 
35

 
 
 
35

 
 
 
35

 
 
 
37

 
 
 
38




1



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
 
September 30, 2016 
 (Unaudited)
 
December 31, 2015
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
105,989

 
$
118,677

Securities owned, at fair value
3,646

 
4,079

Receivables from clearing brokers
35,018

 
44,466

Receivables from other broker-dealers
1,561

 
2,150

Notes receivable from financial advisors, net
29,180

 
26,967

Other receivables, net
51,689

 
48,564

Fixed assets, net
21,121

 
21,753

Restricted assets
1,011

 
1,011

Intangible assets, net
125,500

 
137,931

Goodwill
125,911

 
125,572

Cash surrender value of life insurance
9,616

 
9,247

Other assets
33,514

 
33,688

      Total assets
$
543,756

 
$
574,105



 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
Securities sold, but not yet purchased, at fair value
$
676

 
$
238

Accrued compensation
19,055

 
29,115

Commissions and fees payable
57,136

 
59,995

Accounts payable and accrued liabilities
37,189

 
30,804

Deferred rent
1,480

 
1,551

Deferred income taxes
10,145

 
4,416

Deferred compensation liability
17,308

 
17,211

Accrued interest
1,107

 
823

Notes payable, net of $1,001 and $1,492 unamortized discount in 2016 and 2015, respectively and net of debt issuance costs of $1 and $253 in 2016 and 2015, respectively.
48,364

 
53,921

      Total liabilities
192,460

 
198,074

 
 
 
 
Commitments and contingencies (Note 9)


 


SHAREHOLDERS' EQUITY:
 
 
 
Preferred stock, $.0001 par value; authorized 50,000,000 shares in 2016 and 25,000,000 shares in 2015: 8% Series A cumulative redeemable preferred stock; authorized 17,290,000 shares in 2016 and 2015; 15,844,916 and 14,683,021 shares issued and outstanding in 2016 and 2015, respectively (liquidation preference $396,123 in 2016 and $367,076 in 2015)
1

 
1

Common stock, $.0001 par value; authorized 1,000,000,000 shares in 2016 and 800,000,000 shares in 2015; shares issued and outstanding, 183,639,584 in 2016 and 182,338,038 in 2015
19

 
19

   Additional paid-in capital
509,335

 
511,138

   Accumulated deficit
(158,055
)
 
(135,156
)
 


 

      Total shareholders’ equity of the Company
351,300

 
376,002

 
 
 
 
Noncontrolling interest
(4
)
 
29

 
 
 
 
      Total shareholders' equity
351,296

 
376,031

 
 
 
 
      Total liabilities and shareholders' equity
$
543,756

 
$
574,105

See accompanying notes.

2



LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Commissions
 
$
128,010

 
$
136,919

 
$
381,933

 
$
419,664

Advisory fees
 
118,873

 
118,050

 
341,749

 
347,984

Investment banking
 
4,424

 
7,318

 
15,445

 
25,132

Principal transactions
 
173

 
(250
)
 
686

 
757

Interest and dividends
 
2,799

 
1,076

 
7,198

 
2,423

Service fees and other income
 
20,044

 
19,101

 
62,883

 
61,825

Total revenues
 
274,323

 
282,214

 
809,894

 
857,785

Expenses:
 
 
 
 
 
 
 
 
Commissions and fees
 
207,342

 
214,659

 
605,881

 
647,034

Compensation and benefits
 
35,984

 
35,911

 
108,871

 
107,710

Non-cash compensation
 
1,300

 
242

 
3,996

 
5,926

Brokerage, communication and clearance fees
 
4,331

 
5,170

 
12,304

 
15,706

Rent and occupancy, net of sublease revenue
 
2,334

 
2,412

 
7,021

 
7,374

Professional services
 
3,540

 
3,628

 
10,543

 
10,472

Interest
 
1,133

 
1,255

 
3,512

 
3,970

Depreciation and amortization
 
7,014

 
6,798

 
21,130

 
20,080

Acquisition-related expenses
 
936

 
139

 
1,003

 
257

Loss on extinguishment of debt
 

 

 

 
252

Amortization of retention and forgivable loans
 
1,403

 
2,223

 
4,381

 
7,831

Other
 
15,845

 
12,926

 
45,946

 
42,478

Total expenses
 
281,162

 
285,363

 
824,588

 
869,090

Loss before item shown below
 
(6,839
)
 
(3,149
)
 
(14,694
)
 
(11,305
)
Change in fair value of contingent consideration
 
(72
)
 

 
(178
)
 
31

Loss before income taxes
 
(6,911
)
 
(3,149
)
 
(14,872
)
 
(11,274
)
Income tax expense (benefit)
 
604

 
(212
)
 
8,060

 
(2,288
)
Net loss
 
(7,515
)
 
(2,937
)
 
(22,932
)
 
(8,986
)
Net loss attributable to noncontrolling interest
 
(1
)
 
(11
)
 
(33
)
 
(39
)
Net loss attributable to the Company
 
$
(7,514
)
 
$
(2,926
)
 
$
(22,899
)
 
$
(8,947
)
Dividends declared on preferred stock
 
(7,780
)
 
(7,289
)
 
(22,514
)
 
(20,773
)
Net loss available to common shareholders
 
$
(15,294
)
 
$
(10,215
)
 
$
(45,413
)
 
$
(29,720
)
 
 
 
 
 
 
 
 
 
Net loss per common share available to common shareholders (basic)
 
$
(0.08
)
 
$
(0.06
)
 
$
(0.25
)
 
$
(0.16
)
 
 
 
 
 
 
 
 
 
Net loss per common share available to common shareholders (diluted)
 
$
(0.08
)
 
$
(0.06
)
 
$
(0.25
)
 
$
(0.16
)
 
 
 
 
 
 
 
 
 
Weighted average common shares used in computation of per share data:
 
 
 
 
 
 
 
 
Basic
 
181,032,730

 
183,519,768

 
181,023,737

 
184,415,040

Diluted
 
181,032,730

 
183,519,768

 
181,023,737

 
184,415,040


See accompanying notes.

3



LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Dollars 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, 2015
 
14,683,021

 
$
1

 
182,338,038

 
$
19

 
$
511,138

 
$
(135,156
)
 
$
29

 
$
376,031

Issuance of common stock under employee stock purchase plan
 

 

 
171,959

 

 
392

 

 

 
392

Exercise of stock options (net of 1,116,783 shares tendered in payment of exercise price)
 

 

 
3,703,770

 

 
2,256

 

 

 
2,256

Exercise of warrants (net of 846,789 shares tendered in payment of exercise price)
 

 

 
1,689,545

 

 

 

 

 

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

 

 

 

 
32

 

 

 
32

Stock-based compensation to employees
 

 

 

 

 
3,964

 

 

 
3,964

Issuance of restricted stock
 

 

 
1,331,000

 

 

 

 

 

Repurchase and retirement of common stock, including 901,691 shares surrendered for tax withholdings of $2,039
 

 

 
(5,594,728
)
 

 
(13,554
)
 

 

 
(13,554
)
Preferred stock issued, net of underwriting discount and expenses of $682
 
1,161,895

 

 

 

 
27,621

 

 

 
27,621

Preferred stock dividends declared and paid
 

 

 

 

 
(22,514
)
 

 

 
(22,514
)
Net loss
 

 

 

 

 

 
(22,899
)
 
(33
)
 
(22,932
)
Balance - September 30, 2016
 
15,844,916

 
$
1

 
183,639,584

 
$
19

 
$
509,335

 
$
(158,055
)
 
$
(4
)
 
$
351,296



See accompanying notes.

4

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

 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(22,932
)
 
$
(8,986
)
      Adjustments to reconcile net loss to
 
 
 
          net cash provided by operating activities:
 
 
 
Change in fair value of contingent consideration
178

 
(31
)
Adjustment to deferred rent
(71
)
 
59

Amortization of intangible assets
15,501

 
15,445

Loss on extinguishment of debt

 
252

Amortization of debt discount
491

 
503

Amortization of debt issue cost
252

 
282

Amortization of retention loans
4,381

 
7,831

Depreciation and other amortization
5,629

 
4,635

Deferred income taxes
5,729

 
(3,259
)
Benefit attributable to reduction of goodwill
59

 
57

Non-cash interest expense on forgivable loan
308

 
464

Non-cash compensation expense
3,996

 
5,926

Write-off of receivable from subtenant

 
855

Loss on write-off of furniture, fixtures and leasehold improvements, net
1

 
9

 
 
 
 
(Increase) decrease in operating assets, net of effects of acquisition:
 
 
 
Securities owned, at fair value
433

 
1,943

Receivables from clearing brokers
9,448

 
(11,883
)
Receivables from other broker-dealers
589

 
827

Other receivables, net
(3,125
)
 
1,026

Notes receivable from financial advisors, net
(6,594
)
 
(7,058
)
Cash surrender value of life insurance
(369
)
 
1,598

Other assets
174

 
1,760

 
 
 
 
Increase (decrease) in operating liabilities, net of effects of acquisition:
 
 
 
Securities sold, but not yet purchased, at fair value
438

 
189

Accrued compensation
(10,060
)
 
(570
)
Accrued interest
(24
)
 
(263
)
Commissions and fees payable
(2,859
)
 
1,267

Deferred compensation liability
97

 
(1,075
)
Accounts payable and accrued liabilities
3,931

 
(9,224
)
      Net cash provided by operating activities   
5,601

 
2,579

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition of certain assets of Wall Street
(1,192
)
 

Acquisition of SSN, net of cash acquired

 
(16,919
)
Acquisition of certain assets of Dalton

 
(2,100
)
Purchases of fixed assets
(4,998
)
 
(6,674
)
Increase in restricted assets

 
(291
)
Acquisition of certain assets of Select Brokerage

 
(503
)
      Net cash used in investing activities   
(6,190
)
 
(26,487
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of Series A preferred stock
27,621

 
82,727

Issuance of common stock
2,648

 
1,499

Series A preferred stock dividends paid
(22,514
)
 
(20,773
)
Repurchase and retirement of common stock
(13,554
)
 
(11,837
)
Bank loan and revolver repayments
(524
)
 
(357
)
Principal payments on notes payable
(5,776
)
 
(15,930
)
Third party investment in subsidiary

 
40

      Net cash (used in) provided by financing activities   
(12,099
)
 
35,369

Net (decrease) increase in cash and cash equivalents
(12,688
)
 
11,461

Cash and cash equivalents, beginning of period
118,677

 
103,087

      Cash and cash equivalents, end of period   
$
105,989

 
$
114,548

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
2,485

 
$
2,977

Taxes paid
634

 
1,723

 
 
 
 
Acquisition of certain assets of Wall Street:
 
 
 
Assets acquired
$
3,468

 
$

Contingent consideration payable to seller
(2,276
)
 

Net cash paid in acquisition
$
1,192

 
$

 
 
 
 
Acquisition of SSN:
 
 
 
Assets acquired
$

 
$
61,759

Liabilities assumed

 
(14,472
)
Net assets acquired

 
47,287

Promissory note

 
(18,697
)
Due to selling shareholders

 
(3,590
)
Cash paid in acquisition

 
25,000

Cash acquired in acquisition

 
(8,081
)
Net cash paid in acquisition
$

 
$
16,919

 
 
 
 
Acquisition of certain assets of Dalton:
 
 
 
Assets acquired
$

 
$
2,689

Payable to seller

 
(589
)
Net cash paid in acquisition
$

 
$
2,100

 
 
 
 
Acquisition of certain assets of Select Brokerage:
 
 
 
Assets acquired
$

 
$
3,021

Payable to seller

 
(2,518
)
Net cash paid in acquisition
$

 
$
503



See accompanying notes.

5



LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Dollars 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, Inc. (collectively with related companies, ‘‘Securities America’’), Triad Advisors, Inc. (‘‘Triad’’), Investacorp, Inc. (collectively with related companies, ‘‘Investacorp’’), KMS Financial Services, Inc. (“KMS”), Securities Service Network, Inc. ("SSN"), which the Company acquired in January 2015, Ladenburg Thalmann & Co. Inc. (‘‘Ladenburg’’), Ladenburg Thalmann Asset Management Inc. (‘‘LTAM’’), Premier Trust, Inc. (‘‘Premier Trust’’) and Highland Capital Brokerage, Inc. (“Highland”).

Securities America, Triad, Investacorp, KMS and SSN are registered broker-dealers and investment advisors that serve the independent financial advisor community. The independent financial advisors of these independent broker-dealers 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.

Securities America's, Triad's, Investacorp's, KMS', 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, 2015 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, 2015 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.


6


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


Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-12, Compensation-Stock Compensation (Topic 718), which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 became effective for the Company for annual periods and interim periods beginning after December 15, 2015. The adoption of ASU 2014-12 in the quarter ended March 31, 2016 did not have any impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU requires retrospective adoption and is effective for interim and annual periods beginning after December 15, 2015. The adoption of ASU 2015-03 in the quarter ended March 31, 2016 did not have a material impact on the Company's consolidated statement of financial condition.

In September 2015, the FASB issued ASU 2015-16, Business Combination (Topic 805): Simplifying the Accounting for Measurement Period Adjustments, which requires adjustments to provisional amounts initially recorded in a business combination that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 also requires the disclosure of the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance is effective for the Company beginning January 1, 2016. The adoption of ASU 2015-16 in the quarter ended March 31, 2016 did not have any impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently assessing the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB amended the existing accounting standards for stock-based compensation, ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments impact several aspects of accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is required to adopt the amendments in the first quarter of 2017, with early adoption permitted. If early adoption is elected, all amendments must be adopted in the same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. The Company has not yet elected early adoption and is currently assessing the impact that the adoption of these amendments and the transition alternatives will have on its consolidated financial statements.

2. Acquisition

In September 2016, Securities America Financial Corporation, the parent company of Securities America, purchased certain assets of the broker-dealer business of Wall Street Financial Group, Inc. ("Wall Street") that was deemed to be a business acquisition. Relationships with certain registered representatives and investment advisor representatives including their client accounts were acquired. The consideration for the transaction was $3,468, consisting of cash of $1,192 and contingent consideration having a fair value of $2,276, for which a liability was recognized based on the estimated acquisition-date fair value of the potential earn-out.



7


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

The liability was valued using a Monte Carlo simulation based option pricing model. The fair value measurement of the earn-out, which relates to the three-year period following closing, is based on unobservable inputs (Level 3) and reflects the Company’s own assumptions. The purchase price was allocated as follows: $3,070 to identifiable intangibles and $398 to goodwill.

Results of operations relating to the acquired assets of Wall Street are included in the accompanying consolidated statements of operations from the date of acquisition and were not material. In addition, based on materiality, pro forma results are not presented.

3. Securities Owned and Securities Sold, But Not Yet Purchased
The components of securities owned and securities sold, but not yet purchased at September 30, 2016 and December 31, 2015, which are carried at fair value were as follows:
September 30, 2016
 
Securities Owned   
 
Securities Sold,
But Not Yet Purchased
Certificates of deposit
 
$
457

 
$

Debt securities
 
1,624

 
(15
)
U.S. Treasury notes
 
101

 
(149
)
Common stock and warrants
 
255

 
(512
)
Restricted common stock and warrants
 
572

 

Other investments
 
637

 

Total
 
$
3,646

 
$
(676
)
 
 
 
 
 
December 31, 2015
 
 
 
 
Certificates of deposit
 
$
359

 
$

Debt securities
 
1,125

 
(30
)
U.S. Treasury notes
 
101

 
(200
)
Common stock and warrants
 
927

 
(8
)
Restricted common stock and warrants
 
958

 

Other investments
 
609

 

Total
 
$
4,079

 
$
(238
)

As of September 30, 2016 and December 31, 2015, approximately $3,236 and $3,383, respectively, of securities owned were deposited with clearing brokers and may be sold or hypothecated by the clearing brokers pursuant to clearing agreements with such clearing brokers. Securities sold, but not yet purchased, represents obligations of the Company’s subsidiaries to purchase the specified financial instrument at the then current market price. Accordingly, these transactions result in off-balance-sheet risk as the Company’s subsidiaries’ ultimate obligation to repurchase such securities may exceed the amount recognized in the consolidated statements of financial condition.

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:

8

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



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.

Securities are classified as follows:

As of September 30, 2016:
Securities owned, at fair value
 
   Level 1
 
   Level 2
 
   Level 3
 
   Total
Certificates of deposit
 
$
457

 
$

 
$

 
$
457

Debt securities
 

 
1,624

 

 
1,624

U.S. Treasury notes
 

 
101

 

 
101

Common stock and warrants
 
255

 
572

 

 
827

Other investments
 

 
637

 

 
637

Total
 
$
712

 
$
2,934

 
$

 
$
3,646


Securities sold, but not yet purchased, at fair value
 
   Level 1
 
   Level 2
 
   Level 3
 
   Total
Debt securities
 
$

 
$
(15
)
 
$

 
$
(15
)
US Treasury Notes
 

 
(149
)
 

 
(149
)
Common stock and warrants
 
(512
)
 

 

 
(512
)
Total
 
$
(512
)
 
$
(164
)
 
$

 
$
(676
)

As of December 31, 2015:
Securities owned, at fair value
 
   Level 1
 
   Level 2
 
   Level 3
 
   Total
Certificates of deposit
 
$
359

 
$

 
$

 
$
359

Debt securities
 

 
1,125

 

 
1,125

U.S. Treasury notes
 

 
101

 

 
101

Common stock and warrants
 
927

 
958

 

 
1,885

Other investments
 

 
609

 

 
609

Total
 
$
1,286

 
$
2,793

 
$

 
$
4,079


Securities sold, but not yet purchased, at fair value
 
   Level 1
 
   Level 2
 
   Level 3
 
   Total
Debt securities
 
$

 
$
(30
)
 
$

 
$
(30
)
U.S. Treasury notes
 

 
(200
)
 

 
(200
)
Common stock and warrants
 
(8
)
 

 

 
(8
)
Total
 
$
(8
)
 
$
(230
)
 
$

 
$
(238
)
    
Debt securities and U.S. Treasury notes are valued based on recently executed transactions, market price quotations, and pricing models that factor in, as applicable, interest rates and bond default risk spreads.

Warrants are carried at a discount to fair value as determined by using the Black-Scholes option pricing model due to illiquidity. This model takes into account the underlying securities' current market values, the underlying securities' market volatility, the terms of the warrants, exercise prices and risk-free return rate. As of September 30, 2016 and December 31, 2015, the fair values of the warrants were $272 and $545, respectively, and are included in common stock and warrants (Level 2) above.


9

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



From time to time, Ladenburg receives common stock as compensation for investment banking services. These securities are restricted under applicable securities laws and may be freely traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements of Rule 144 of the Securities Act of 1933, as amended, including the requisite holding period. Restricted common stock is classified as Level 2 securities.
Other investments consist principally of equity interests in real estate investment trusts, which are valued based on broker-dealer quotations and pricing available from buyers in the secondary market, and are classified as Level 2 securities.

4. Intangible Assets

At September 30, 2016 and December 31, 2015, intangible assets subject to amortization consisted of the following:

 
 
 
 
September 30, 2016
 
December 31, 2015
  
 
Weighted-Average Estimated Useful Life (years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Technology
 
7.9
 
$
25,563

 
$
14,938

 
$
25,563

 
$
12,488

Relationships with financial advisors
 
15.3
 
113,681

 
38,350

 
110,671

 
32,028

Covenants not-to-compete
 
3.9
 
6,095

 
4,308

 
6,035

 
3,347

Customer accounts
 
8.3
 
2,029

 
1,944

 
2,029

 
1,765

Trade names
 
7.7
 
16,910

 
9,461

 
16,910

 
7,790

Renewal revenue
 
7.9
 
41,381

 
11,168

 
41,381

 
7,263

Referral agreement
 
6.6
 
124

 
114

 
124

 
101

Total
 
 
 
$
205,783

 
$
80,283

 
$
202,713

 
$
64,782


Aggregate amortization expense for the nine months ended September 30, 2016 and 2015, respectively, amounted to $15,501 and $15,445. The weighted-average amortization period for total amortizable intangibles at September 30, 2016 is 9.59 years. As of September 30, 2016, the remaining estimated amortization expense for each of the five succeeding years and thereafter is as follows:

 
 
Remainder of 2016
$
5,188

2017
20,379

2018
19,594

2019
16,124

2020
14,641

2021 - 2039
49,574

  
$
125,500



5. Goodwill

Changes to the carrying amount of goodwill during the nine months ended September 30, 2016 are as follows:


10

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


 
 
Ladenburg
 
Independent Brokerage and Advisory Services
 
Insurance Brokerage
 
Total
Balance as of December 31, 2015
 
$
301

 
$
112,572

 
$
12,699

 
$
125,572

Benefit applied to reduce goodwill
 

 
(59
)
 

 
(59
)
Business acquisition
 

 
398

 

 
398

Balance as of September 30, 2016
 
$
301

 
$
112,911

 
$
12,699

 
$
125,911


During the three and nine months ended September 30, 2016, the carrying amount of goodwill was reduced by $20 and $59, respectively, representing state tax benefit realized for the excess of tax deductible goodwill over goodwill recognized for reporting purposes with respect to the Company’s subsidiaries.

6. Net Capital Requirements

The Company’s broker-dealer subsidiaries are subject to the SEC’s Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital. Each of Securities America, Triad, Investacorp, KMS and Ladenburg has elected to compute its net capital under the alternative method allowed by this rule, and, at September 30, 2016, each had a $250 minimum net capital requirement. At September 30, 2016, Securities America had regulatory net capital of $8,602, Triad had regulatory net capital of $10,796, Investacorp had regulatory net capital of $5,719, KMS had regulatory net capital of $4,685 and Ladenburg had regulatory net capital of $17,210.

SSN has elected to compute its net capital under the basic method allowed by the Net Capital Rule and at September 30, 2016, it had net capital of $6,030, which was $5,226 in excess of its required net capital of $804, and had a net capital ratio of 2.00 to 1.

Securities America, Triad, Investacorp, KMS, SSN and Ladenburg claim exemptions from the provisions of the SEC’s Rule 15c3-3 pursuant to paragraph (k)(2)(ii) as they clear their customer transactions through correspondent brokers on a fully disclosed basis.

Premier Trust, chartered by the state of Nevada, is subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division.

Under Nevada law, Premier Trust must maintain minimum stockholders’ equity of at least $1,000, including at least $250 in cash. At September 30, 2016, Premier Trust had stockholders’ equity of $1,648, including at least $250 in cash.

7. Income Taxes

The Company’s interim income tax provision or benefit consists of U.S. federal and state income taxes based on the estimated annual effective rate that the Company expects for the full year together with the tax effect of discrete items. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of September 30, 2016, the estimated annual effective tax rate for 2016 (exclusive of discrete items) is approximately 20% of projected pre-tax loss and consists of a deferred tax provision related to tax amortization of goodwill and a provision for state and local income taxes.

For the three and nine months ended September 30, 2016, the Company recorded an income tax provision of $604 on a pre-tax loss of $6,911 and an income tax provision of $8,060 on a pre-tax loss of $14,872, respectively. For the three and nine months ended September 30, 2016, we have not provided an income tax benefit on our pre-tax loss as we concluded that our deferred tax assets are not realizable on a more-likely-than not basis. The income tax provision for the nine months ended September 30, 2016 includes a discrete deferred tax provision of $6,009 related to an increase in the Company’s valuation allowance related to deferred tax assets existing as of December 31, 2015 and a discrete deferred tax benefit of $921 related to an overaccrual of deferred taxes applicable to goodwill in prior years.

For the three and nine months ended September 30, 2015, the Company recorded an income tax benefit of $212 on pre-tax loss of $3,149 and an income tax benefit of $2,288 on a pre-tax loss of $11,274, respectively. The effective tax rate


11

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


differs from the federal statutory income tax rate for the 2015 period due to nondeductible expenses and state and local income taxes.

In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income.
Significant weight is given to positive and negative evidence that is objectively verifiable. As of June 30, 2016, we projected that as of December 31, 2016, the Company may be in a three year cumulative loss position which is considered to be a significant piece of negative evidence.

Based on these factors, we established a full valuation allowance against our deferred tax assets as of June 30, 2016. In recording the valuation allowance, deferred tax liabilities associated with indefinite lived intangible assets, such as tax deductible goodwill, generally cannot be used as a source of income to realize deferred tax assets with a finite loss carryforward period, as such liabilities would only reverse on impairment or sale of the related asset which events are not anticipated. The Company does not amortize goodwill for financial reporting purposes but has amortized goodwill with tax basis for tax purposes. As of September 30, 2016, the deferred tax liability related to tax deductible goodwill approximates $10,145.

8.
Notes Payable

Notes payable consisted of the following:
 
September 30,
2016
 
December 31,
2015
Notes payable to clearing firm under forgivable loans
$
6,429

 
$
6,429

Notes payable to finance Securities America acquisition, net of $17 and $172 of unamortized discount in 2016 and 2015, respectively (see Note 15)
17,958

 
17,804

Note payable under subsidiary's term loan with bank
259

 
564

Note payable under subsidiary's revolver with bank
731

 
950

Notes payable by subsidiary to certain former shareholders of Highland
6,738

 
6,738

Notes payable to KMS' former shareholders, net of $251 and $343 of unamortized discount in 2016 and 2015, respectively
4,321

 
5,711

Notes payable to SSN's former shareholders, net of $733 and $977 of unamortized discount in 2016 and 2015, respectively
11,929

 
15,378

Other

 
600

Less: Unamortized debt issuance costs
(1
)
 
(253
)
Total
$
48,364

 
$
53,921


The Company estimates that the fair value of notes payable was $46,185 at September 30, 2016 and $50,416 at December 31, 2015 based on then current interest rates at which similar amounts of debt could then be borrowed (Level 2 inputs). As of September 30, 2016, the Company was in compliance with all covenants in its debt agreements.

The lenders under the notes payable to finance the Securities America acquisition (the “November 2011 Loan”) included Frost Nevada Investments Trust (“Frost Nevada”), an affiliate of the Company's Chairman of the Board and principal shareholder, and Vector Group, Ltd. (“Vector Group”), a principal shareholder of the Company. At September 30, 2016, outstanding principal amounts loaned by Frost Nevada and Vector Group were $15,120 and $1,680, respectively. See Note 15 for information regarding cancellation of the November 2011 Loan in October 2016.

At September 30, 2016, the Company had $40,000 available under its $40,000 revolving credit agreement with an affiliate of its principal shareholder. On March 9, 2016, the Company entered into an amendment to the revolving credit agreement to extend the maturity date thereunder for a period of five years to August 25, 2021.



12

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


KMS had a subordinated note payable to a current officer of KMS, in the amount of $600 payable in August 2016, plus monthly interest with an applicable rate of prime plus one percent. The note was repaid in full on August 1, 2016.

9. Commitments and Contingencies

Litigation and Regulatory Matters

In December 2014 and January 2015, two purported class action suits were filed in the U.S. District Court for the Southern District of New York against American Realty Capital Partners, Inc. (“ARCP”), certain affiliated entities and individuals, ARCP’s auditing firm, and the underwriters of ARCP’s May 2014 $1,656,000 common stock offering (“May 2014 Offering”) and three prior note offerings. The complaints have been consolidated. Ladenburg was named as a defendant as one of 17 underwriters of the May 2014 Offering and as one of eight underwriters of ARCP’s July 2013 offering of $300,000 in convertible notes. The complaint alleges, among other things, that the offering materials were misleading based on financial reporting of expenses, improperly-calculated AFFO (adjusted funds from operations), and false and misleading Sarbanes-Oxley certifications, including statements as to ARCP’s internal controls, and that the underwriters are liable for violations of federal securities laws. The plaintiffs seek an unspecified amount of compensatory damages, as well as other relief. In June 2016, the court denied the underwriters’ motions to dismiss the complaint. Ladenburg intends to vigorously defend against these claims.

In November 2015, two purported class action complaints were filed in state court in Tennessee against officers and directors of Miller Energy Resources, Inc. (“Miller”), as well as Miller’s auditors and nine firms that underwrote six securities offerings in 2013 and 2014, and raised approximately $151,000. Ladenburg was one of the underwriters of two of the offerings. The complaints allege, among other things, that the offering materials were misleading based on the purportedly overstated valuation of certain assets, and that the underwriters are liable for violations of federal securities laws. The plaintiffs seek an unspecified amount of compensatory damages, as well as other relief. In December 2015 the defendants removed the complaints to the U.S. District Court for the Eastern District of Tennessee; in September 2016, the court denied the plaintiffs' motions to remand. Defendants' motion to consolidate the actions is currently pending. Ladenburg intends to vigorously defend against these claims.

In January 2016, an amended complaint for a purported class action was filed in the U.S. District Court for the Southern District of Texas against Plains All American Pipeline, L.P., related entities and their officers and directors. The amended complaint added as defendants Ladenburg and other underwriters of securities offerings in 2013 and 2014 that in the aggregate raised approximately $2,900,000. Ladenburg was one of the underwriters of the October 2013 initial public offering. The complaints allege, among other things, that the offering materials were misleading based on representations concerning the maintenance and integrity of the issuer’s pipelines, and that the underwriters are liable for violations of federal securities laws. The plaintiffs seek an unspecified amount of compensatory damages, as well as other relief. Motions to dismiss are currently pending. Ladenburg intends to vigorously defend against these claims.

In September 2015, a client of a former Triad registered representative filed an arbitration claim concerning the suitability of investments in tenant-in-common interests purchased through Section 1031 tax-deferred exchanges, and seeking compensatory damages totaling $3,714 and other relief. In April 2016, the parties entered into a settlement agreement resolving the claims; the amount paid by Triad in connection with the settlement was not material.

During the period from March 2015 to February 2016, eight arbitration claims and one lawsuit (U.S. District Court for the Middle District of Alabama) were filed against Triad and others by a total of 45 individuals concerning purported misrepresentations and unsuitability of trading in their advisory accounts. All or most of the transactions at issue were effected through an investment advisory firm not affiliated with Triad or the Company. The lawsuit was transferred to arbitration. Eight arbitration claims were settled during the period from February to June 2016 and the amounts paid by Triad in connection with those settlements were not material. The remaining arbitration claim concerns two individuals and seeks an immaterial amount in compensatory damages and other relief. Triad intends to vigorously defend against the remaining claims.

In September 2015, Securities America was named as a defendant in lawsuits brought by the bankruptcy trustee of a broker-dealer (U.S. Bankruptcy Court for the District of Minnesota) and a putative class action by the shareholders of that broker-dealer (U.S. District Court for the District of Minnesota). The lawsuits allege that certain of the debtor broker-dealer’s assets were transferred to Securities America in June 2015 for inadequate consideration. In October 2016, a


13

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


settlement was reached with the bankruptcy trustee resolving those claims; the amount paid in connection with the settlement was not material. The remaining complaint seeks an unspecified amount of compensatory damages, and other relief. Securities America intends to vigorously defend against these claims.

Commencing in October 2013, certain states have requested that Securities America provide information concerning the suitability of purchases of non-traded REIT securities by their residents. Securities America has complied with the requests.
In March 2016 and October 2016, Securities America received additional correspondence from two such states concerning sales of non-traded REIT securities to its residents. The Company does not believe that any action is warranted in connection with such state notice and believes that no material outcome would result if an action were commenced.

During the period from May to July 2016, four arbitration claims were filed against Ladenburg by former customers concerning purported unauthorized trading, excessive trading and mishandling of their accounts by a former Ladenburg registered representative, and asserting compensatory damages in excess of $4,300. Ladenburg intends to vigorously defend against these claims.

SEC examination staff reports provided to Triad and Securities America Advisors, Inc. in May and August 2016, respectively, asserted that the firms had acted inconsistently with their fiduciary duties in recommending and selecting mutual fund share classes that paid 12b-1 fees where lower cost share classes also were available in those same funds. The staff also asserted that the firms’ disclosures of potential conflicts of interest and compensation related to the mutual fund share classes that paid 12b-1 fees were insufficient. The firms are reviewing the reports and the underlying circumstances, including, without limitation, the amounts of such payments and the contents of the firms’ disclosures to clients, are determining appropriate remedial actions, which may include restitution to clients, and are in communication with the staff as the firms seek to resolve the matter.

In the ordinary course of business, in addition to the above disclosed matters, the Company's subsidiaries are defendants in other litigation, arbitration and regulatory proceedings and may be subject to unasserted claims primarily in connection with their activities as securities broker-dealers or as a result of services provided in connection with securities offerings. Such litigation and claims may involve substantial or indeterminate amounts and are in varying stages of legal proceedings. When the Company believes that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated (after giving effect to any expected insurance recovery), the Company accrues such amount. Upon final resolution, amounts payable may differ materially from amounts accrued.

The Company had accrued liabilities in the amount of approximately $3,224 at September 30, 2016 for certain pending matters, which are included in accounts payable and accrued liabilities. During the three and nine months ended September 30, 2016, the Company charged $3,584 and $5,384, respectively, to operations with respect to such matters. For other pending matters, the Company was unable to estimate a range of possible loss; however, in the opinion of management, after consultation with counsel, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

Operating Leases
New lease activity subsequent to December 31, 2015 is as follows:

In connection with an office lease amendment effective February 1, 2016, a subsidiary is obligated under a non-cancelable lease agreement for office space for a period of 14 years under which the annual rental payments are $1,791 for 2016 and 2017, $1,954 for 2018 and increasing by 2% per year thereafter, for an aggregate commitment of $49,821.

In connection with a new office lease dated March 28, 2016, a subsidiary has an option to lease office space, which has not yet been constructed, for 12 years and, if exercised, would require the payment of an estimated average annual rent of $1,811, subject to certain adjustments. If the subsidiary does not exercise the option to lease the newly-built office space by May 31, 2017, it would be subject to certain financial penalties.

10. Off-Balance-Sheet Risk and Concentration of Credit Risk

Securities America, Triad, Investacorp, KMS, SSN and Ladenburg do not carry accounts for customers or perform custodial functions related to customers’ securities. They introduce all of their customer transactions, which are not reflected in these


14

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


financial statements, to clearing brokers, which maintain cash and the customers’ accounts and clear such transactions. Also, the clearing brokers provide the clearing and depository operations for proprietary securities transactions. These activities create exposure to off-balance-sheet risk in the event that customers do not fulfill their obligations to the clearing brokers, as each of Securities America, Triad, Investacorp, KMS, SSN and Ladenburg has agreed to indemnify such clearing brokers for any resulting losses. Each of such entities continually assesses risk associated with each customer who is on margin credit and records an estimated loss when management believes collection from the customer is unlikely.

The clearing operations for the Securities America, Triad, Investacorp, KMS, SSN and Ladenburg securities transactions are provided by three clearing brokers. At September 30, 2016, the amount due from these clearing brokers was $35,018, which represents a substantial concentration of credit risk should these clearing brokers be unable to fulfill their obligations.

In the normal course of business, Securities America, Triad, Investacorp, KMS, SSN and Ladenburg may enter into transactions in financial instruments with off-balance sheet risk. As of September 30, 2016, Securities America, Triad and Ladenburg sold securities that they do not own and will therefore be obligated to purchase such securities at a future date. These obligations have been recorded in the statements of financial condition at the fair values of the related securities, and such entities will incur a loss if, at the time of purchase, the fair value of the securities has increased since the applicable date of sale.

The Company and its subsidiaries maintain cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

11. Shareholders’ Equity

Repurchase Program

In March 2007, the Company’s board of directors authorized the repurchase of up to 2,500,000 shares of the Company’s common stock from time to time on the open market or in privately negotiated transactions, depending on market conditions. In October 2011, the board approved an amendment to the repurchase program to permit the purchase of up to an additional 5,000,000 shares and another amendment was approved in November 2014 to permit the repurchase of an additional 10,000,000 shares. Since inception through September 30, 2016, 16,962,604 shares of common stock have been repurchased for $43,496 under the program and have been retired, including the repurchase of 1,597,126 shares for $3,800 and 4,693,037 shares for $11,515 during the three and nine months ended September 30, 2016, respectively. As of September 30, 2016, 537,396 shares remained available for purchase under the program. See Note 15 for information regarding a further amendment to the Company's stock repurchase program.

Stock Compensation Plans

Options granted during the nine months ended September 30, 2016 were as follows:

Grant Date
 
Expiration Date
Shares
Exercise Price
Grant Date Fair Value (1)
January 14, 2016
(2) 
January 14, 2026
900,000
$
2.65

$
960

January 14, 2016
(2)(3) 
January 14, 2026
30,000
$
2.65

$
50

May 18, 2016
(4) 
May 18, 2026
400,000
$
2.40

$
417

 
 
 
1,330,000
 
$
1,427


(1)
Fair value is calculated using the Black-Scholes option pricing model.
(2)
Options vest in four equal annual installments beginning on the first anniversary of the respective grant dates.
(3)
Compensation expense recognized each period is based on the award's estimated value at the most recent reporting date.
(4)
Options vest on the one year anniversary of the grant date.

Options to purchase 17,407 and 69,835 shares of common stock were forfeited during the three and nine months ended September 30, 2016, respectively.


15

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



As of September 30, 2016, there was $4,984 of unrecognized compensation cost for stock-based compensation related to options, of which $1,060 related to the 2016 grants described above. This cost is expected to be recognized over the vesting periods of the options, which on a weighted-average basis are approximately 2.12 years for all grants and approximately 2.67 years for the 2016 grants.

Options and warrants were exercised to purchase 3,797,272 and 7,356,887 shares of the Company’s common stock during the three and nine months ended September 30, 2016, respectively, for which the intrinsic value on dates of exercise was $5,426 and $10,210, respectively. See Note 15 for information regarding the exercise of warrants to purchase 10,699,999 shares of the Company's common stock in October 2016.

Restricted stock granted during the nine months ended September 30, 2016 was as follows:
Grant Date
 
Final Vesting Date
Shares
Fair Value (1)
January 14, 2016
(2) 
January 14, 2020
1,050,000

$
2,384

January 22, 2016
(2) 
January 22, 2020
281,000

$
604

May 26, 2016
(2) 
May 26, 2020
10,000

$
26

 
 
 
1,341,000

$
3,014


(1)
Fair value is calculated using the closing price on the grant date.
(2)
Vests in four equal annual installments beginning on the first anniversary of the grant date.

For the nine months ended September 30, 2016, 10,000 shares of restricted stock were forfeited.

As of September 30, 2016, there was $5,006 of unrecognized compensation cost for stock-based compensation related to restricted stock grants, of which $2,358 related to the 2016 grants described above. This cost is expected to be recognized over the vesting periods of the restricted stock, which on a weighted-average basis are approximately 2.72 years for all grants and approximately 3.25 years for the 2016 grants.

Stock-based compensation, including options and restricted stock, attributed to employees was $1,286 and $3,964 for the three and nine months ended September 30, 2016, respectively.

Stock based compensation for consultants and independent financial advisors was $14 and $32 for the three and nine months ended September 30, 2016, respectively. In the three and nine months ended September 30, 2016, 1,588,988 and 2,865,263 shares, respectively, were surrendered to cover payment of exercise prices and taxes.

Capital Stock

On May 18, 2016, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to increase the number of shares of preferred stock authorized from
25,000,000 to 50,000,000 and to increase the number of shares of common stock authorized from 800,000,000 to 1,000,000,000.

During the three and nine months ended September 30, 2016, the Company sold 789,468 and 1,161,895 shares of Series A Preferred Stock, pursuant to the Company's “at the market” offering program, which provided total gross proceeds to the Company of $19,266 and $28,303, before deducting the commission paid to unaffiliated sales agents and offering expenses aggregating $422 and $682, respectively.

For the three and nine months ended September 30, 2016, the Company paid dividends of $7,780 and $22,514, respectively, on its outstanding Series A Preferred Stock based on a monthly dividend of approximately $0.1667 per share.


12. Per Share Data

Basic net loss per common share is computed by dividing net loss attributable to the Company, decreased in the case of income and increased in the case of loss by dividends declared on preferred stock, by the weighted-average number of common shares outstanding.


16

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


The dilutive effect of incremental common shares potentially issuable under outstanding options and warrants and unvested restricted stock is included in diluted earnings per share utilizing the treasury stock method. A reconciliation of basic and diluted common shares used in the computation of per share data follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
September 30,
 
2016
 
2015
 
2016
 
2015
Basic weighted-average shares
181,032,730

 
183,519,768

 
181,023,737

 
184,415,040

Effect of dilutive securities:
 
 
 
 
 
 
 
     Options to purchase common stock

 

 

 

     Warrants to purchase common stock

 

 

 

Dilutive potential common shares

 

 

 

Weighted average common shares outstanding and dilutive potential common shares
181,032,730

 
183,519,768

 
181,023,737

 
184,415,040


For the three and nine months ended September 30, 2016, options and warrants to purchase 50,189,120 shares of common stock and 2,245,167 restricted shares of common stock were not included in the computation of diluted loss per share as the effect would have been anti-dilutive. For the three and nine months ended September 30, 2015, options and warrants to purchase 57,181,576 shares of common stock and 1,220,490 restricted shares of common stock were not included in the diluted computation as the effect would have been anti-dilutive.


13. Noncontrolling Interest

Arbor Point Advisors, LLC (“APA”), a registered investment advisor, which began operations in 2013, provides investment advisory services through APA's licensed investment advisor representatives. Securities America holds an 80% interest in APA and an unaffiliated entity owns a 20% interest. Because Securities America is the controlling managing member of APA, the results of operations of APA are included in the Company's consolidated financial statements, and amounts attributable to the 20% unaffiliated investor are recorded as a noncontrolling interest.

14. Segment Information

The Company has three operating segments. The independent brokerage and advisory services segment includes the broker-dealer and investment advisory services provided by the Company's independent broker-dealer subsidiaries to their independent contractor financial advisors and the wealth management services provided by Premier Trust. The Ladenburg segment includes the investment banking, sales and trading and asset management services and investment activities conducted by Ladenburg and LTAM. The insurance brokerage segment includes the wholesale insurance brokerage activities provided by Highland, which delivers life insurance, fixed and equity indexed annuities and long-term care solutions to investment and insurance providers.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for acquisition-related expense, amortization of retention and forgivable loans, change in fair value of contingent consideration related to acquisitions, loss on extinguishment of debt, non-cash compensation expense, financial advisor recruiting expense and other expense, which includes loss on write-off of receivable from subtenant, excise and franchise tax expense, severance costs and compensation expense that may be paid in stock, is the primary profit measure the Company's management uses in evaluating financial performance for its reportable segments. EBITDA, as adjusted, is considered a non-GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. The Company considers EBITDA, as adjusted, important in evaluating its financial performance on a consistent basis across various periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted, enables the Company's Board of Directors and management to monitor and evaluate the business on a consistent basis. The Company uses EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and potential acquisitions. The Company believes that EBITDA, as adjusted, eliminates items that are not indicative of its core operating performance, such as amortization of retention and forgivable loans and financial advisor recruiting expenses, or do not involve a cash outlay, such as stock-related compensation, which is expected to remain a key element in our long-term incentive compensation program. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute for, income (loss) before income taxes, net income (loss) and cash flows provided by (used in) operating activities.

Segment information for the three and nine months ended September 30, 2016 and 2015 was as follows:

Three Months Ended September 30, 2016
 
Independent
Brokerage and
Advisory Services
 
Ladenburg
 
Insurance Brokerage
 
Corporate
 
Total
Revenues
 
$
251,045

 
$
10,424

 
$
12,680

 
$
174

 
$
274,323

Income (loss) before income taxes
 
607

 
(1,959
)
 
(1,611
)
 
(3,948
)
(1) 
(6,911
)
EBITDA, as adjusted (4)
 
9,503

 
(1,604
)
 
462

 
(2,797
)
 
5,564

Identifiable assets (2)
 
411,577

 
33,046

 
54,301

 
44,832

(3) 
543,756

Depreciation and amortization
 
5,008

 
185

 
1,804

 
17

 
7,014

Interest
 
795

 
4

 
170

 
164

 
1,133

Capital expenditures
 
1,267

 
19

 
12

 

 
1,298

Non-cash compensation
 
253

 
135

 
61

 
851

 
1,300

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 

 
 
 
 
 
 
 

Revenues
 
$
256,671

 
$
13,248

 
$
12,210

 
$
85

 
$
282,214

Income (loss) before income taxes
 
3,141

 
(144
)
 
(1,585
)
 
(4,561
)
(1) 
(3,149
)
EBITDA, as adjusted (4)
 
10,925

 
98

 
417

 
(3,080
)
 
8,360

Identifiable assets (2)
 
400,290

 
44,053

 
63,522

 
55,425

(3) 
563,290

Depreciation and amortization
 
4,834

 
178

 
1,769

 
17

 
6,798

Interest
 
834

 

 
172

 
249

 
1,255

Capital expenditures
 
1,646

 
51

 
188

 

 
1,885

Non-cash compensation
 
(914
)
 
151

 
60

 
945

 
242

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
Independent
Brokerage and
Advisory Services
 
Ladenburg
 
Insurance Brokerage
 
Corporate
 
Total
Revenues
 
$
738,429

 
$
33,457

 
$
37,422

 
$
586

 
$
809,894

Income (loss) before income taxes
 
7,291

 
(6,071
)
 
(4,963
)
 
(11,129
)
(1) 
(14,872
)
EBITDA, as adjusted (4)
 
32,222

 
(4,862
)
 
1,294

 
(7,505
)
 
21,149

Identifiable assets (2)
 
411,577

 
33,046

 
54,301

 
44,832

(3) 
543,756

Depreciation and amortization
 
15,173

 
546

 
5,360

 
51

 
21,130

Interest
 
2,446

 
4

 
510

 
552

 
3,512

Capital expenditures
 
4,661

 
139

 
198

 

 
4,998

Non-cash compensation
 
756

 
406

 
183

 
2,651

 
3,996

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
777,009

 
$
44,806

 
$
35,680

 
$
290

 
$
857,785

Income (loss) before income taxes
 
4,562

 
2,420

 
(5,628
)
 
(12,628
)
(1) 
(11,274
)
EBITDA, as adjusted (4)
 
33,677

 
4,765

 
203

 
(7,967
)
 
30,678

Identifiable assets (2)
 
400,290

 
44,053

 
63,522

 
55,425

(3) 
563,290

Depreciation and amortization
 
14,377

 
528

 
5,141

 
34

 
20,080

Interest
 
2,713

 
7

 
511

 
739

 
3,970

Capital expenditures
 
5,849

 
87

 
652

 
86

 
6,674

Non-cash compensation
 
2,191

 
486

 
179

 
3,070

 
5,926

 
 
 
 
 
 
 
 
 
 
 

(1) 
Includes interest expense, compensation, professional fees, and other general and administrative expenses.

(2) 
Identifiable assets are presented as of the end of the period.

(3) 
Includes cash and cash equivalents of $36,017 and $53,399 as of September 30, 2016 and 2015, respectively.

(4) 
The following table reconciles EBITDA, as adjusted, to loss before income taxes for the three and nine months ended September 30, 2016 and 2015.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
September 30,
 
EBITDA, as adjusted
 
2016
 
2015
 
2016
 
2015
 
Independent Brokerage and Advisory Services
 
$
9,503

 
$
10,925

 
$
32,222

 
$
33,677

 
Ladenburg
 
(1,604
)
 
98

 
(4,862
)
 
4,765

 
Insurance Brokerage
 
462

 
417

 
1,294

 
203

 
Corporate
 
(2,797
)
 
(3,080
)
 
(7,505
)
 
(7,967
)
 
Total Segments
 
5,564

 
8,360

 
21,149

 
30,678

 
 
 
 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
 
 
Interest income
 
187

 
69

 
479

 
178

 
Change in fair value of contingent consideration
 
(72
)
 

 
(178
)
 
31

 
Loss on extinguishment of debt
 

 

 

 
(252
)
 
Interest expense
 
(1,133
)
 
(1,255
)
 
(3,512
)
 
(3,970
)
 
Depreciation and amortization
 
(7,014
)
 
(6,798
)
 
(21,130
)
 
(20,080
)
 
Non-cash compensation expense
 
(1,300
)
 
(242
)
 
(3,996
)
 
(5,926
)
 
Financial advisor recruiting expense
 
(514
)
 
(764
)
 
(1,191
)
 
(1,670
)
 
Amortization of retention and forgivable loans
 
(1,403
)
 
(2,223
)
 
(4,381
)
 
(7,831
)
 
Acquisition-related expenses (1)
 
(936
)
 
(139
)
 
(1,003
)
 
(257
)
 
Other (2)
 
(289
)
 
(146
)
 
(1,076
)
 
(2,136
)
 
Net loss attributable to noncontrolling interest
 
(1
)
 
(11
)
 
(33
)
 
(39
)
 
Loss before income taxes
 
$
(6,911
)
 
$
(3,149
)
 
$
(14,872
)
 
$
(11,274
)
 

(1) 
Includes $60 in the nine months ended September 30, 2016, for acquisition-related expense that was previously included in professional services expense.

(2) 
Includes loss on severance costs of $44 and $277 for the three and nine months ended September 30, 2016 and excise and franchise tax expense of $109 and $343 for the three and nine months ended September 30, 2016 and compensation expense that may be paid in stock, of $133 and $399 for the three and nine months ended September 30, 2016, respectively. Includes loss on write-off of receivable from subtenant of $855 for the nine months ended September 30, 2015, rent expense due to default of subtenant of $468 for the nine months ended September 30, 2015 and compensation expense that may be paid in stock, of $133 and $399, for the three and nine months ended September 30, 2015, respectively, and excise and franchise tax expense of $263 for the nine months ended September 30, 2015.


15. Subsequent Events

On October 26, 2016, holders of warrants to purchase an aggregate of 10,699,999 shares of Company common stock for $1.68 per share exercised such warrants in full. The Company issued these warrants in connection with the November 2011 Loan, which was used to finance the acquisition of Securities America. Each holder paid the exercise price by cancellation of indebtedness represented by the remaining balance of the promissory note held by such lender. Accordingly, promissory notes with an aggregate remaining outstanding balance of $17,976 were canceled and no indebtedness related to the November 2011 Loan remains outstanding.

On November 7, 2016, an amendment to the stock repurchase program was approved to permit the repurchase of up to an additional 10,000,000 shares.


17

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







Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, except per share data)

Overview

We are a diversified financial services company engaged in independent brokerage and advisory services, investment banking, equity research, institutional sales and trading, asset management services, wholesale life insurance brokerage and trust services through our principal subsidiaries, Securities America, Inc. (collectively with related companies, “Securities America”), Triad Advisors, Inc. (“Triad”), Securities Service Network, Inc. (“SSN”), Investacorp, Inc. (collectively with related companies, “Investacorp”), KMS Financial Services, Inc. (“KMS”), Ladenburg Thalmann & Co. Inc. (“Ladenburg”), Ladenburg Thalmann Asset Management Inc. (“LTAM”), Highland Capital Brokerage, Inc. (“Highland”), and Premier Trust, Inc. (“Premier Trust”). We are committed to establishing a significant presence in the financial services industry by meeting the varying investment needs of our clients.

Through our acquisitions of Securities America, Triad, SSN, Investacorp and KMS, we have established a leadership position in the independent broker-dealer industry. During the past decade, this has been one of the fastest growing segments of the financial services industry. With approximately 4,000 financial advisors located in 50 states, we have become one of the largest independent broker-dealer networks. We believe that we have the opportunity through acquisitions, recruiting and internal growth to continue expanding our market share in this segment over the next several years. Since 2007, our plan has been to marry the more stable and recurring revenue and cash flows of the independent broker-dealer business with Ladenburg’s traditional investment banking, capital markets, institutional sales and trading and related businesses.
    
We have three operating segments: (i) the independent brokerage and advisory services segment, (ii) the Ladenburg segment and (iii) the insurance brokerage segment.

The independent brokerage and advisory services segment includes the broker-dealer and investment advisory services provided by our independent broker-dealer subsidiaries to their independent contractor financial advisors and wealth management services provided by Premier Trust. The Ladenburg segment includes the investment banking, sales and trading and asset management services and investment activities conducted by Ladenburg and LTAM. The insurance brokerage segment includes the wholesale insurance brokerage activities conducted by Highland, which delivers life insurance, fixed and equity indexed annuities, as well as long-term care solutions to investment and insurance providers.

Each of Securities America, Triad, SSN, Investacorp, KMS and Ladenburg is subject to regulation by, among others, the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”), and the Municipal Securities Rulemaking Board and 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.
 
Recent Developments
    
Preferred Stock Offerings

During the nine months ended September 30, 2016, we sold 1,161,895 shares of our Series A Preferred Stock pursuant to an "at the market” offering, which provided net proceeds of $27,621.

Common Stock Repurchases; Amendment to Stock Repurchase Program



18


During the nine months ended September 30, 2016, we repurchased and retired an aggregate of 5,594,728 shares of our common stock for $13,554, representing an average price per share of $2.42. On November 7, 2016, an amendment to the stock repurchase program was approved to permit the repurchase of up to an additional 10,000,000 shares.




Retirement of Debt and Exercise of Warrants

On October 26, 2016, holders of warrants to purchase an aggregate of 10,699,999 shares of our common stock for $1.68 per share exercised such warrants in full. We issued these warrants in connection with the November 2011 Loan, which was used to finance the acquisition of Securities America. Each holder paid the exercise price by cancellation of indebtedness represented by the remaining balance of the promissory note held by such lender. Accordingly, promissory notes with an aggregate remaining outstanding balance of $17,976 were canceled and no indebtedness related to the November 2011 Loan remains outstanding.


Acquisition Strategy

We continue to explore opportunities to grow our businesses, including through possible acquisitions of other financial services firms, both domestically and internationally. These acquisitions may involve payments of material amounts of cash, the incurrence of material amounts of debt, which would increase our leverage, or the issuance of significant amounts of our equity securities, which may be dilutive to our existing shareholders. We cannot assure you that we will be able to complete any such possible acquisitions on acceptable terms or at all or, if we do, that any acquired business will be profitable. We also may not be able to integrate successfully acquired businesses into our existing business and operations.

During the three years ended September 30, 2016, in connection with acquisitions, we issued 3,981,684 shares of common stock and incurred $60,600 of indebtedness related to acquisitions, $23,972 of which was outstanding as of September 30, 2016.

Critical Accounting Policies

There have been no material changes from the critical accounting policies set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our annual report on Form 10-K for the year ended December 31, 2015. Please refer to that section for disclosures regarding the critical accounting policies related to our business.
                       
Results of Operations

The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The unaudited condensed consolidated financial statements include our accounts and the accounts of our subsidiaries.

The following table includes a reconciliation of EBITDA, as adjusted, to net loss attributable to the Company as reported:



19


 
Three Months Ended 
 September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
Total revenues
$
274,323

 
$
282,214

 
$
809,894

 
$
857,785

 
Total expenses
281,162

 
285,363

 
824,588

 
869,090

 
Loss before income taxes
(6,911
)
 
(3,149
)
 
(14,872
)
 
(11,274
)
 
Net loss attributable to the Company
(7,514
)
 
(2,926
)
 
(22,899
)
 
(8,947
)
 
 
 
 
 
 
 
 
 
 
Reconciliation of EBITDA, as adjusted, to net loss attributable to the Company:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA, as adjusted
$
5,564

 
$
8,360

 
$
21,149

 
$
30,678

 
Add:
 
 
 
 
 
 
 
 
   Interest income
187

 
69

 
479

 
178

 
 Change in fair value of contingent consideration related to acquisitions
(72
)
 

 
(178
)
 
31