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, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
 
 
Accelerated filer
[x]
 
 
 
 
 
 
 
 
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
 
Smaller reporting company
[ ]
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
[ ]
 




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ___ No  X 
    
As of November 6, 2017 there were 198,392,671 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, 2017

TABLE OF CONTENTS

 
 
Page
PART I. FINANCIAL INFORMATION
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART  II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






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, 2017 
 (Unaudited)
 
December 31, 2016
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
100,739

 
$
98,930

Securities owned, at fair value
4,147

 
3,543

Receivables from clearing brokers
56,722

 
41,492

Receivables from other broker-dealers
1,927

 
853

Notes receivable from financial advisors, net
33,984

 
32,611

Other receivables, net
48,791

 
54,634

Fixed assets, net
22,822

 
21,253

Restricted assets
760

 
1,011

Intangible assets, net
108,796

 
124,938

Goodwill
124,211

 
124,031

Cash surrender value of life insurance
12,200

 
10,210

Other assets
37,516

 
32,497

      Total assets
$
552,615

 
$
546,003



 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
Securities sold, but not yet purchased, at fair value
$
198

 
$
382

Accrued compensation
28,607

 
26,299

Commissions and fees payable
62,384

 
60,594

Accounts payable and accrued liabilities
42,895

 
39,876

Deferred rent
2,083

 
1,764

Deferred income taxes
10,469

 
10,642

Deferred compensation liability
18,486

 
17,247

Accrued interest
482

 
281

Notes payable, net of $535 and $872 unamortized discount in 2017 and 2016, respectively.
28,182

 
26,417

      Total liabilities
193,786

 
183,502

 
 
 
 
Commitments and contingencies (Note 7)


 


SHAREHOLDERS' EQUITY:
 
 
 
Preferred stock, $.0001 par value; authorized 50,000,000 shares in 2017 and 2016: 8% Series A cumulative redeemable preferred stock; designated 23,844,916 shares in 2017 and 17,290,000 in 2016; shares issued and outstanding 16,596,828 in 2017 and 15,844,916 in 2016 (liquidation preference $414,921 and $396,123 in 2017 and 2016)
2

 
1

Common stock, $.0001 par value; authorized 1,000,000,000 shares in 2017 and 2016; shares issued and outstanding, 196,342,490 in 2017 and 194,057,738 in 2016
20

 
19

   Additional paid-in capital
515,208

 
519,879

   Accumulated deficit
(156,423
)
 
(157,425
)
 
 
 
 
      Total shareholders’ equity of the Company
358,807

 
362,474

 
 
 
 
Noncontrolling interest
22

 
27

 
 
 
 
      Total shareholders' equity
358,829

 
362,501

 
 
 
 
      Total liabilities and shareholders' equity
$
552,615

 
$
546,003

See accompanying notes.

1




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,
 
 
 
2017
 
2016
 
2017
 
2016
 
Revenues:
 
 
 
 
 
 
 
 
 
Commissions
 
$
131,453

 
$
127,515

 
$
394,466

 
$
380,523

 
Advisory fees
 
146,400

 
118,873

 
407,542

 
341,749

 
Investment banking
 
14,745

 
4,424

 
34,121

 
15,445

 
Principal transactions
 
107

 
173

 
685

 
686

 
Interest and dividends
 
7,303

 
2,799

 
16,945

 
7,198

 
Service fees and other income
 
22,301

 
20,539

 
70,377

 
64,293

 
Total revenues
 
322,309

 
274,323

 
924,136

 
809,894

 
Expenses:
 
 
 
 
 
 
 
 
 
Commissions and fees
 
235,020

 
207,342

 
679,843

 
605,881

 
Compensation and benefits
 
45,131

 
35,984

 
125,131

 
108,871

 
Non-cash compensation
 
1,341

 
1,300

 
4,148

 
3,996

 
Brokerage, communication and clearance fees
 
4,173

 
4,331

 
13,647

 
12,304

 
Rent and occupancy, net of sublease revenue
 
2,305

 
2,334

 
7,165

 
7,021

 
Professional services
 
4,717

 
3,371

 
12,651

 
9,785

 
Interest
 
601

 
1,133

 
1,599

 
3,512

 
Depreciation and amortization
 
7,104

 
7,014

 
21,830

 
21,130

 
Acquisition-related expenses
 
55

 
936

 
320

 
1,003

 
Amortization of retention and forgivable loans
 
1,808

 
1,403

 
5,070

 
4,381

 
Other
 
15,394

 
16,014

 
51,492

 
46,704

 
Total expenses
 
317,649

 
281,162

 
922,896

 
824,588

 
Income (loss) before item shown below
 
4,660

 
(6,839
)
 
1,240

 
(14,694
)
 
Change in fair value of contingent consideration
 
(3
)
 
(72
)
 
86

 
(178
)
 
Income (loss) before income taxes
 
4,657

 
(6,911
)
 
1,326

 
(14,872
)
 
Income tax expense
 
1,255

 
604

 
278

 
8,060

 
Net income (loss)
 
3,402

 
(7,515
)
 
1,048

 
(22,932
)
 
Net income (loss) attributable to noncontrolling interest
 
3

 
(1
)
 
(5
)
 
(33
)
 
Net income (loss) attributable to the Company
 
$
3,399

 
$
(7,514
)
 
$
1,053

 
$
(22,899
)
 
Dividends declared on preferred stock
 
(8,149
)
 
(7,780
)
 
(24,026
)
 
(22,514
)
 
Net loss available to common shareholders
 
$
(4,750
)
 
$
(15,294
)
 
$
(22,973
)
 
$
(45,413
)
 
 
 
 
 
 
 
 
 
 
 
Net loss per common share available to common shareholders (basic)
 
$
(0.02
)
 
$
(0.08
)
 
$
(0.12
)
 
$
(0.25
)
 
 
 
 
 
 
 
 
 
 
 
Net loss per common share available to common shareholders (diluted)
 
$
(0.02
)
 
$
(0.08
)
 
$
(0.12
)
 
$
(0.25
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares used in computation of per share data:
 
 
 
 
 
 
 
 
 
Basic
 
192,912,643

 
181,032,730

 
192,498,380

 
181,023,737

 
Diluted
 
192,912,643

 
181,032,730

 
192,498,380

 
181,023,737

 
See accompanying notes.

2



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, 2016
 
15,844,916

 
$
1

 
194,057,738

 
$
19

 
$
519,879

 
$
(157,425
)
 
$
27

 
$
362,501

Issuance of common stock under employee stock purchase plan
 

 

 
142,298

 

 
346

 

 

 
346

Exercise of stock options (net of 1,715,019 shares surrendered in payment of exercise price)
 

 

 
2,193,374

 
1

 
4,029

 

 

 
4,030

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

 

 

 

 
40

 

 

 
40

Stock-based compensation to employees
 

 

 

 

 
4,108

 

 

 
4,108

Issuance of restricted stock
 

 

 
1,771,000

 

 

 

 

 

Restricted stock forfeitures
 

 

 
(5,000
)
 

 

 

 

 

Repurchase and retirement of common stock, including 218,587 shares surrendered for tax withholdings and 19,658 shares tendered in payment of exercise price
 

 

 
(1,816,920
)
 

 
(4,450
)
 

 

 
(4,450
)
Repurchase of stock option award for cash
 

 

 

 

 
(850
)
 

 

 
(850
)
Preferred stock issued, net of underwriting discount and expense of $706
 
751,912

 
1

 

 

 
18,031

 

 

 
18,032

Preferred stock dividends declared and paid
 

 

 

 

 
(24,026
)
 

 

 
(24,026
)
Common stock dividends declared and paid
 

 

 

 

 
(1,962
)
 

 

 
(1,962
)
Cumulative effect of adoption of ASU 2016-09 (Note 1)
 

 

 

 

 
63

 
(51
)
 

 
12

Net income
 

 

 

 

 

 
1,053

 
(5
)
 
1,048

Balance - September 30, 2017
 
16,596,828

 
$
2

 
196,342,490

 
$
20

 
$
515,208

 
$
(156,423
)
 
$
22

 
$
358,829



See accompanying notes.

3

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

 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income (loss)
$
1,048

 
$
(22,932
)
      Adjustments to reconcile net loss to
 
 
 
          net cash provided by operating activities:
 
 
 
Change in fair value of contingent consideration
(86
)
 
178

Adjustment to deferred rent
319

 
(71
)
Amortization of intangible assets
16,142

 
15,501

Amortization of debt discount
337

 
491

Amortization of debt issue cost

 
252

Amortization of retention and forgivable loans
5,070

 
4,381

Depreciation and other amortization
5,688

 
5,629

Deferred income taxes
(161
)
 
5,729

Benefit attributable to reduction of goodwill

 
59

Non-cash interest expense on forgivable loan
266

 
308

Non-cash compensation expense
4,148

 
3,996

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

 
1

 
 
 
 
(Increase) decrease in operating assets
 
 
 
Securities owned, at fair value
(604
)
 
433

Receivables from clearing brokers
(15,230
)
 
9,448

Receivables from other broker-dealers
(1,074
)
 
589

Other receivables, net
5,843

 
(3,125
)
Notes receivable from financial advisors, net
(6,443
)
 
(6,594
)
Cash surrender value of life insurance
(1,990
)
 
(369
)
Other assets
(5,019
)
 
174

 
 
 
 
Increase (decrease) in operating liabilities
 
 
 
Securities sold, but not yet purchased, at fair value
(184
)
 
438

Accrued compensation
2,308

 
(10,060
)
Accrued interest
(65
)
 
(24
)
Commissions and fees payable
1,790

 
(2,859
)
Deferred compensation liability
1,239

 
97

Accounts payable and accrued liabilities
3,105

 
3,931

      Net cash provided by operating activities   
16,448

 
5,601

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition of certain assets of Wall Street
0

 
(1,192
)
Acquisition of certain assets of Foothill Securities
(180
)
 

Purchases of fixed assets
(7,258
)
 
(4,998
)
Decrease in restricted assets
251

 

      Net cash used in investing activities   
(7,187
)
 
(6,190
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of Series A preferred stock
18,032

 
27,621

Issuance of common stock
4,376

 
2,648

Series A preferred stock dividends paid
(24,026
)
 
(22,514
)
Common stock dividends paid
(1,962
)
 

Repurchase of stock option award for cash
(850
)
 

Repurchase and retirement of common stock
(4,450
)
 
(13,554
)
Borrowings on term loan
8,000

 

Bank loan and revolver repayments
(1,305
)
 
(524
)
Principal payments on notes payable
(5,267
)
 
(5,776
)
      Net cash used in financing activities   
(7,452
)
 
(12,099
)
Net increase (decrease) in cash and cash equivalents
1,809

 
(12,688
)
Cash and cash equivalents, beginning of period
98,930

 
118,677

      Cash and cash equivalents, end of period   
$
100,739

 
$
105,989

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
1,062

 
$
2,485

Taxes paid
566

 
634

 
 
 
 
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 certain assets of Foothill Securities:
 
 
 
Assets acquired

 

Contingent consideration payable to seller
(180
)
 

Net cash paid in acquisition
$
(180
)
 
$



See accompanying notes.

4



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”), Ladenburg Thalmann & Co. Inc. (‘‘Ladenburg’’), Ladenburg Thalmann Asset Management Inc. (‘‘LTAM’’), Premier Trust, Inc. (‘‘Premier Trust’’), Highland Capital Brokerage, Inc. (“Highland”) and Ladenburg Thalmann Annuity Insurance Services LLC (‘‘LTAIS’’).

Securities America, Triad, Investacorp, KMS and SSN are registered investment advisors and broker-dealers that serve the independent financial advisor community. The independent financial advisors of these independent advisory and brokerage firms primarily serve retail clients. Such entities derive revenue from advisory fees and commissions, primarily from the sale of mutual funds, variable annuity products and other financial products and services.


Ladenburg is a full service registered broker-dealer that has been a member of the New York Stock Exchange since 1879. Broker-dealer activities include sales and trading and investment banking. Ladenburg provides its services principally to middle-market and emerging growth companies and high net worth individuals through a coordinated effort among corporate finance, capital markets, brokerage and trading professionals.


LTAM is a registered investment advisor. It offers various asset management products utilized by Ladenburg and Premier Trust’s clients, as well as clients of the Company's independent financial advisors.

Premier Trust, a Nevada trust company, provides wealth management services, including administration of personal trusts and retirement accounts, estate and financial planning and custody services.

Highland is an independent insurance broker that delivers life insurance, fixed and equity indexed annuities and long-term care solutions to investment and insurance providers. Highland provides specialized point-of-sale support along with advanced marketing and estate and business planning techniques, delivering customized insurance solutions to both institutional clients and independent producers. LTAIS provides marketing strategies, product expertise, and back-office processing for fixed and equity-indexed annuities.

Securities America's, Triad's, Investacorp's, KMS's, SSN's and Ladenburg's customer transactions are cleared through clearing brokers on a fully-disclosed basis and such entities are subject to regulation by, among others, the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board. Each entity is a member of the Securities Investor Protection Corporation. Highland and LTAIS are 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, 2016 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, 2016 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.

5

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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (the “Standard”), which completes the joint effort by the FASB and the International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and the International Financial Reporting Standards. The FASB has subsequently issued several amendments, including deferral of the effective date until January 1, 2018, clarification of principal versus agent considerations, narrow scope improvements and other technical corrections. The Standard also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The Standard, including clarifying amendments, will become effective for fiscal years and interim periods within those years, beginning after December 15, 2017, with early adoption permitted.

The Company expects to adopt the provisions of this guidance on January 1, 2018 using the modified retrospective approach with a cumulative-effect adjustment to opening retained earnings. The Company has performed an initial assessment of its revenue contracts and identified the following areas of potential impact upon adoption of the Standard:

- The presentation of revenues in the statement of operations on a gross basis or net of commissions earned by third party advisors and brokers, as follows: (a) presentation of a portion of advisory services revenue on a net basis which have historically been reported on a gross basis; and (b) presentation of a portion of insurance commissions revenue on a gross basis which have historically been reported on a net basis. While the Company’s total revenue is expected to be reduced by these changes, there will be offsetting impact to operating expenses and no impact to operating profit.
- The timing of revenue recognized for commissions on future renewals of insurance policies sold will likely be accelerated, as these future commissions represent variable consideration under the Standard and are required to be estimated and included in the transaction price, subject to the constraint.
- The Company expects to capitalize incremental costs to obtain a contract, which have historically been recorded as period expense.

The Company is currently assessing the financial statement impact of these changes upon adoption.

Additionally, the Company’s ongoing implementation work includes evaluating changes required upon adoption of the Standard relating to: (i) new disclosures for disaggregation of revenues, contract balances and performance obligations; (ii) information technology systems; and (iii) internal controls over financial reporting.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company does not expect a material effect on its 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's current lease arrangements expire through 2030 and the Company is currently assessing the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.




6

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


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 adopted the amendments in the first quarter of 2017. Prior to adoption of ASU 2016-09, tax attributes related to stock option windfall deductions were not recorded until they resulted in a reduction of cash tax payable. As of December 31, 2016, the tax benefit related to the excluded windfall deductions for federal and state purposes was approximately $4,458. Upon adoption of ASU 2016-09, the Company recognized the tax benefit related to the excluded windfall deductions as a deferred tax asset with a corresponding offset of $4,446 to valuation allowance. In regards to the forfeiture policy election, the Company is not continuing to estimate the number of awards expected to be forfeited, rather the Company will elect to account for forfeitures as they occur. As of December 31, 2016, additional compensation cost related to the elimination of estimated forfeitures was $63, net of estimated tax benefit of $12, which is reflected in the statement of changes in shareholders' equity. No other terms of the adopted guidance resulted in an impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice on how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees.

ASU 2016-15 also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. ASU 2016-15 is effective for the Company's fiscal year beginning January 1, 2018. Early adoption is permitted. The standard requires application using a retrospective transition method. The adoption of this guidance is not expected to have a material impact to our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) ("ASU 2016-18"). ASU 2016-18 provides guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2017 using a retrospective adoption method and early adoption is permitted. The adoption of this guidance is not expected to have a material impact to our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 became effective for transactions beginning in the first quarter of 2017 and is being applied prospectively. The adoption of ASU 2017-01 did not have any impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, an amendment to simplify the subsequent quantitative measurement of goodwill by eliminating step two from the goodwill impairment test. As amended, an entity will recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform the qualitative test for a reporting unit to determine if the quantitative impairment test is necessary. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and applies prospectively. Early adoption is permitted, including in an interim period, for impairment tests performed after January 1, 2017. The adoption of this guidance is not expected to have a material impact to our consolidated financial statements.

2. Fair Value of Assets and Liabilities
Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market or income approach are used to measure fair value.



7

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


The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3 — Unobservable inputs which reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.

The following tables present the carrying values and estimated fair values at September 30, 2017 and December 31, 2016 of financial assets and liabilities, excluding financial instruments that are carried at fair value on a recurring basis, and information is provided on their classification within the fair value hierarchy. Such instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk.
 
 
 
September 30, 2017
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$
100,739

 
$
100,739

 
$

 
$
100,739

Receivables from clearing brokers
 
56,722

 

 
56,722

 
56,722

Receivables from other broker-dealers
 
1,927

 

 
1,927

 
1,927

Notes receivables, net (1)
 
33,984

 

 
33,984

 
33,984

Other receivables, net
 
48,791

 

 
48,791

 
48,791

 
 
$
242,163

 
$
100,739

 
$
141,424

 
$
242,163

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Accrued compensation
 
$
28,607

 
$

 
$
28,607

 
$
28,607

Commissions and fees payable
 
62,384

 

 
62,384

 
62,384

Accounts payable and accrued liabilities (2)
 
40,120

 

 
40,120

 
40,120

Accrued interest
 
482

 

 
482

 
482

Notes payable, net (3)
 
28,182

 

 
26,425

 
26,425

 
 
$
159,775

 
$

 
$
158,018

 
$
158,018


(1) Carrying value approximates fair value, which is determined based on a valuation technique to convert future cash payments or forgiveness transactions to a single discounted preset value amount.
(2) Excludes contingent consideration liabilities of $2,775.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.





8

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


 
 
December 31, 2016
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$
98,930

 
$
98,930

 
$

 
$
98,930

Receivables from clearing brokers
 
41,492

 

 
41,492

 
41,492

Receivables from other broker-dealers
 
853

 

 
853

 
853

Notes receivables, net (1)
 
32,611

 

 
32,611

 
32,611

Other receivables, net
 
54,634

 

 
54,634

 
54,634

 
 
$
228,520

 
$
98,930

 
$
129,590

 
$
228,520

 
 

 

 

 

Liabilities
 

 

 

 

Accrued compensation
 
$
26,299

 
$

 
$
26,299

 
$
26,299

Commissions and fees payable
 
60,594

 

 
60,594

 
60,594

Accounts payable and accrued liabilities (2)
 
32,732

 

 
32,732

 
32,732

Accrued interest
 
281

 

 
281

 
281

Notes payable, net (3)
 
26,417

 

 
24,494

 
24,494

 
 
$
146,323

 
$

 
$
144,400

 
$
144,400


(1) Carrying value approximates fair value, which is determined based on a valuation technique to convert future cash payments or forgiveness transactions to a single discounted preset value amount.
(2) Excludes contingent consideration liabilities of $7,144.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.

The following tables present the financial assets and liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016:

 
 
September 30, 2017
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
 Level 3
 
Total Estimated Fair Value
Certificates of deposit
 
$
483


$
483


$


$


$
483

Debt securities
 
1,861




1,861




1,861

U.S. Treasury notes
 









Common stock and warrants
 
1,803


1,151


652




1,803

Total
 
$
4,147

 
$
1,634

 
$
2,513

 
$

 
$
4,147

 
 
 
 
 
 
 
 
 
 
 
Liabilites
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
 
$
2,775


$


$


$
2,775


$
2,775

Debt securities
 
53




53




53

Common stock and warrants
 
145


145






145

Total
 
$
2,973

 
$
145

 
$
53

 
$
2,775

 
$
2,973





9

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


 
 
December 31, 2016
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
 Level 3
 
Total Estimated Fair Value
Certificates of deposit
 
$
443


$
443


$


$


$
443

Debt securities
 
1,850




1,850




1,850

U.S. Treasury notes
 
101




101




101

Common stock and warrants
 
1,149


494


655




1,149

Total
 
$
3,543

 
$
937

 
$
2,606

 
$

 
$
3,543

 
 
 
 
 
 
 
 
 
 
 
Liabilites
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
 
$
7,144


$


$


$
7,144


$
7,144

Debt securities
 
25




25




25

U.S. Treasury notes
 
96




96




96

Common stock and warrants
 
261


261






261

Total
 
$
7,526

 
$
261

 
$
121

 
$
7,144

 
$
7,526



As of September 30, 2017 and December 31, 2016, approximately $3,510 and $3,161, 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.

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, 2017 and December 31, 2016, the fair values of the warrants were $517 and $252, respectively, and are included in common stock and warrants (Level 2) above.

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.

Set forth below are changes in the carrying value of contingent consideration related to acquisitions, which is included in accounts payable and accrued liabilities:



10

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


Fair value of contingent consideration as of December 31, 2015
 
$
2,813

Payments
 
(827
)
Change in fair value of contingent consideration
 
216

Fair value of contingent consideration in connection with 2016 acquisitions
 
4,942

Fair value of contingent consideration as of December 31, 2016
 
$
7,144

Payments
 
(1,505
)
Change in fair value of contingent consideration
 
(152
)
Fair value of contingent consideration as of March 31, 2017
 
$
5,487

Payments
 
(2,773
)
Change in fair value of contingent consideration
 
63

Fair value of contingent consideration as of June 30, 2017
 
$
2,777

Payments
 
(5
)
Change in fair value of contingent consideration
 
3

Fair value of contingent consideration as of September 30, 2017
 
$
2,775


3. Intangible Assets

At September 30, 2017 and December 31, 2016, intangible assets subject to amortization consisted of the following:

 
 
 
 
September 30, 2017
 
December 31, 2016
  
 
Weighted-Average Estimated Useful Life (years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Technology
 
7.9
 
$
25,563

 
$
18,204

 
$
25,563

 
$
15,754

Relationships with financial advisors
 
14.7
 
117,995

 
47,590

 
117,995

 
40,505

Vendor relationships
 
7
 
3,613

 
3,613

 
3,613

 
3,613

Covenants not-to-compete
 
3.9
 
6,421

 
5,569

 
6,421

 
4,638

Customer accounts
 
8.3
 
2,029

 
2,029

 
2,029

 
1,971

Trade names
 
7.7
 
16,910

 
11,688

 
16,910

 
10,017

Renewal revenue
 
7.9
 
41,381

 
16,423

 
41,381

 
12,481

Relationships with investment banking clients
 
4
 
2,586

 
2,586

 
2,586

 
2,586

Leases
 
6
 
861

 
861

 
861

 
861

Referral agreement
 
6.6
 
124

 
124

 
124

 
119

Other
 
6
 
67

 
67

 
67

 
67

Total
 
 
 
$
217,550

 
$
108,754

 
$
217,550

 
$
92,612


Aggregate amortization expense for the nine months ended September 30, 2017 and 2016 amounted to $16,142 and $15,501, respectively. The weighted-average amortization period for total amortizable intangibles at September 30, 2017 is 8.89 years. As of September 30, 2017, the remaining estimated amortization expense for each of the five succeeding years and thereafter is as follows:


11

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


 
 
Remainder of 2017
$
5,185

2018
20,462

2019
16,987

2020
15,400

2021
10,687

2022 - 2039
40,075

  
$
108,796


4. 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, SSN and Ladenburg has elected to compute its net capital under the alternative method allowed by this rule, and, at September 30, 2017, each had a $250 minimum net capital requirement. At September 30, 2017, Securities America had regulatory net capital of $8,868, Triad had regulatory net capital of $7,288, Investacorp had regulatory net capital of $6,521, KMS had regulatory net capital of $6,976, SSN had regulatory net capital of $6,419 and Ladenburg had regulatory net capital of $22,805.

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, 2017, Premier Trust had stockholders’ equity of $2,188, including at least $250 in cash.

5. 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, 2017, the estimated annual effective tax rate for 2017 (exclusive of discrete items) is approximately 25% of projected pre-tax income. Our estimated annual tax expense consists of a deferred tax provision related to tax amortization of indefinite-lived intangibles including goodwill and a provision for state and local income taxes.

For the three and nine months ended September 30, 2017, the Company recorded an income tax expense of $1,255 on pre-tax income of $4,657 and an income tax expense of $278 on a pre-tax income of $1,326, respectively. Based on objective evidence including being in cumulative losses in recent years, the Company continues to maintain a valuation allowance against its net deferred tax assets as of September 30, 2017.

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 provisions for the nine months ended September 30, 2016 include 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.

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.


12

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


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.

Based on these factors, we established a full valuation allowance against our deferred tax assets effective 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.

6.
Notes Payable

Notes payable consisted of the following:
 
September 30,
2017
 
December 31,
2016
Notes payable to clearing firm under forgivable loans
$
4,285

 
$
4,285

Note payable under subsidiary's term loan with bank
7,192

 
153

Note payable under subsidiary's revolver with bank
276

 
620

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

 
6,738

Notes payable to KMS' former shareholders, net of $128 and $221 of unamortized discount in 2017 and 2016, respectively
2,435

 
3,852

Notes payable to SSN's former shareholders, net of $407 and $651 of unamortized discount in 2017 and 2016, respectively
7,256

 
10,769

Total
$
28,182

 
$
26,417


The Company estimates that the fair value of notes payable was $26,425 at September 30, 2017 and $24,494 at December 31, 2016 based on then current interest rates at which similar amounts of debt could then be borrowed (Level 2 inputs). As of September 30, 2017, the Company was in compliance with all covenants in its debt agreements.

At September 30, 2017, 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.

On April 21, 2017, Securities America Financial Corporation ("SAFC") entered into an amended and restated loan agreement with a financial institution. The loan agreement modified the interest rate for new loans under SAFC's revolving credit facility to prime plus 2.25%. As of September 30, 2017, SAFC had $1,000 of availability under the revolving credit facility. This loan agreement also provides for an additional term loan in the aggregate principal amount of $8,000 subject to certain conditions. This second term loan bears interest at 5.75%, with a maturity date of May 1, 2020. The loans are collateralized by the assets of SAFC and Securities America Advisors, Inc.

In November 2017, the Company amended its 2011 forgivable loan agreement with the primary clearing firm of the Company's subsidiaries, National Financial Services, Inc., to confirm the annual clearing revenue target for 2017 had been satisfied and to permit the incurrence of certain additional indebtedness. Accordingly, the Company will recognize income in the fourth quarter of 2017 of $2,143 and $295 from the forgiveness of principal and interest, respectively, and the outstanding balance under the loan was reduced to $2,143.


7. Commitments and Contingencies

Litigation and Regulatory Matters



13

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


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. In August 2017, the court granted the plaintiffs’ motion for class certification, which is currently pending appeal. 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 November 2016, the cases were consolidated. In August 2017, the court granted in part and denied in part the underwriters' motion to dismiss the complaint. 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. In March 2017 the court granted the defendants’ motions to dismiss without prejudice, and granted the plaintiffs leave to file an amended complaint. In May 2017, the plaintiffs filed a second amended complaint seeking an unspecified amount of compensatory damages, as well as other relief. In July 2017, the defendants filed motions to dismiss the second amended complaint, which are pending. If the motions to dismiss are not granted, Ladenburg 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. Securities America has received additional correspondence from three 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 notices and believes that no material outcome would result if an action were commenced.

During the period from May to July 2017, five 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. In July and October 2017, settlements were reached resolving three of the claims; the amounts paid by Ladenburg in connection with the settlements were not material. The total amount of compensatory damages asserted in the remaining two claims exceeds $3,000. Ladenburg intends to vigorously defend against the remaining 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. Triad has revised its disclosures and has completed restitution to its affected clients. Securities America Advisors, Inc. continues to review the circumstances, including, without limitation, the amounts of such payments and the contents of disclosures to clients, is determining appropriate remedial actions, including restitution to clients, and is in communication with the SEC staff as it seeks to resolve the matter.
 


14

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


In November 2016, a consolidated class action complaint was filed in U.S. District Court for the Western District of Washington against CTI Biopharma Corp., its directors and officers, as well as the underwriters of two securities offerings in 2015 that raised approximately $105,000. Ladenburg was one of the underwriters of the offerings. The complaint alleged, among other things, that the offering materials were misleading in their descriptions of safety results of Phase 3 clinical drug trials for the issuer’s lead drug candidate, and that the underwriters were liable for violations of federal securities laws. The plaintiffs sought an unspecified amount of compensatory damages, as well as other relief. In September 2017, the parties entered into a settlement agreement to resolve the class action complaint, subject to court approval, which provides for no contribution from Ladenburg. A final settlement hearing is set for February 2018. In the event that the lawsuit proceeds, Ladenburg intends to vigorously defend against these claims.

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 $7,407 at September 30, 2017 for certain pending matters which are included in accounts payable and accrued liabilities. During the three and nine months ended September 30, 2017, the Company charged $1,056 and $5,724, 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

At September 30, 2017, the Company was obligated under several non-cancelable lease agreements for office space, which provide for future minimum lease payments aggregating approximately $50,272, through January 2030.

Ladenburg is obligated under an office lease agreement effective February 1, 2017 at 277 Park Avenue, New York, providing for payments of $3,320 through January 20, 2021, which is included in the amount above.

Highland is obligated under a new lease office agreement effective March 1, 2018 providing for payments of $186 through February 28, 2023.

In connection with a new office lease dated March 28, 2016, Securities America has exercised an option to lease office space, which has not yet been constructed, for 12 years and, would require the payment of an estimated average annual rent of $1,811, subject to certain adjustments. During the period June 1 2017 to November 1, 2017 (effective date of the option exercise), Securities America was required to pay certain holding and operating costs and imputed interest charges in the amount of approximately $25 per month.

8. 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 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, 2017, the amount due from these clearing brokers was $56,722, which represents a substantial concentration of credit risk should these clearing brokers be unable to fulfill their obligations.


15

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



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, 2017, 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.

9. 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 each of October 2011, November 2014 and November 2016, the board approved an amendment to the repurchase program to permit the repurchase of an additional 5,000,000 shares, 10,000,000 shares and 10,000,000 shares, respectively. Since inception through September 30, 2017, 19,078,675 shares of common stock have been repurchased for $48,568 under the program and have been retired, including the repurchase of 680,801 shares for $1,682 and 1,578,675 shares for $3,878 during the three and nine months ended September 30, 2017, respectively. As of September 30, 2017, 8,421,325 shares remained available for purchase under the program.

Stock Compensation Plans

As of September 30, 2017, there was $2,169 of unrecognized compensation cost for stock-based compensation related to options. This cost is expected to be recognized over the vesting periods of the options, which on a weighted-average basis are approximately 1.38 years for all grants.

On May 12, 2017, the Company reached an agreement with an option holder to voluntarily cancel and terminate an option to purchase 3,000,000 shares of the company's common stock at the per share exercise price of $1.91 in exchange for the Company paying the option holder $850.

Options were exercised to purchase 2,167,396 and 3,908,393 shares of the Company’s common stock during the three and nine months ended September 30, 2017, respectively, for which the intrinsic value on dates of exercise was $864 and $1,423.

Restricted stock granted during the nine months ended September 30, 2017 was as follows:
Grant Date
 
Final Vesting Date
Shares
Fair Value (1)
January 13, 2017
(2) 
January 13, 2021
1,190,000

$
2,844

January 20, 2017
(2) 
January 20, 2021
301,000

$
674

April 3, 2017
(3) 
January 13, 2021
10,000

$
25,000

May 24, 2017
(2) 
May 24, 2021
240,000

$
535,200

June 7, 2017
(2) 
June 7, 2021
30,000

$
67,800

 
 
 
1,771,000

$
631,518


(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.
(3)
Vests in four equal installments beginning on January 13, 2018.

During the three and nine months ended September 30, 2017, 5,000 shares of restricted stock were forfeited.



16

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, 2017, there was $6,520 of unrecognized compensation cost for stock-based compensation related to restricted stock grants, of which $3,356 related to the 2017 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 2.48 years for all grants and approximately 3.09 years for the 2017 grants.

Stock-based compensation, including options and restricted stock, attributed to employees was $1,324 and $4,108 for the three and nine months ended September 30, 2017.

Stock-based compensation for consultants and independent financial advisors was $17 and $40 for the three and nine months ended September 30, 2017. In the three and nine months ended September 30, 2017, 1,787,686 and 1,953,264 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. On May 22, 2017, the Company designated an additional 6,554,916 shares of Series A Preferred Stock.

During the three and nine months ended September 30, 2017, the Company sold 353,653 and 751,912 shares of Series A Preferred Stock, respectively, pursuant to the Company's “at the market” offering programs, which provided total gross proceeds to the Company of $8,825 and $18,736, before deducting the commission paid to unaffiliated sales agents and offering expenses aggregating $276 and $706, respectively. During the fourth quarter of 2017, through November 1, 2017, the Company sold an additional 415,247 shares of Series A Preferred Stock, which provided total gross proceeds of $10,317 before deducting selling expenses of $206.

For the three and nine months ended September 30, 2017, the Company paid dividends of $8,149 and $24,026, respectively, on its outstanding Series A Preferred Stock based on a monthly dividend of approximately $0.1667 per share. In September 2017, the Company began a quarterly cash dividend on its common stock. During the three months ended September 30, 2017, the Company initiated payment of a quarterly dividend of of $0.01 per share on its outstanding common stock. The Company paid dividends of $1,962 on its common stock during the period.

10. 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.

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,
 
2017
 
2016
 
 
2017
 
2016
Basic weighted-average shares
192,912,643

 
181,032,730

 
 
192,498,380

 
181,023,737

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
192,912,643

 
181,032,730

 
 
192,498,380

 
181,023,737




17

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


For the three and nine months ended September 30, 2017, options and warrants to purchase 31,648,506 shares of common stock and 3,372,094 unvested 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, 2016, options and warrants to purchase 50,189,120 shares of common stock and 2,245,167 unvested restricted shares of common stock were not included in the diluted computation as the effect would have been anti-dilutive.

11. 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.

12. Segment Information

The Company has three operating segments. The independent advisory and brokerage services segment includes the investment advisory and broker-dealer services provided by the Company's independent advisory and brokerage 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, and LTAIS, which provides marketing strategies, product expertise, and back-office processing for fixed and equity-indexed annuities.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, as adjusted for acquisition-related expense, amortization of retention and forgivable loans, change in fair value of contingent consideration related to acquisitions, 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, 2017 and 2016 was as follows:

Three Months Ended September 30, 2017
 
Independent
Advisory and Brokerage Services
 
Ladenburg
 
Insurance Brokerage
 
Corporate
 
Total
Revenues
 
$
286,170

 
$
19,454

 
$
16,358

 
$
327

 
$
322,309

Income (loss) before income taxes
 
8,411

 
3,099

 
(989
)
 
(5,864
)
(1) 
4,657

EBITDA, as adjusted (3)
 
16,956

 
3,479

 
965

 
(4,738
)
 
16,662

Identifiable assets (2)
 
424,155

 
44,759

 
46,157

 
37,544

 
552,615

Depreciation and amortization
 
5,340

 
105

 
1,658

 
1

 
7,104

Interest
 
352

 

 
172

 
77

 
601

Capital expenditures
 
2,208

 
351

 
33

 
(40
)
 
2,552

Non-cash compensation
 
263

 
157

 
5

 
916

 
1,341

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 

 
 
 
 
 
 
 

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 (3)
 
9,503

 
(1,604
)
 
462

 
(2,797
)
 
5,564

Identifiable assets (2)
 
411,577

 
33,046

 
54,301

 
44,832

 
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

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
Independent
Advisory and Brokerage Services
 
Ladenburg
 
Insurance Brokerage
 
Corporate
 
Total
Revenues
 
$
832,866

 
$
49,330

 
$
40,998

 
$
942

 
$
924,136

Income (loss) before income taxes
 
17,409

 
4,408

 
(5,108
)
 
(15,383
)
(1) 
1,326

EBITDA, as adjusted (3)
 
42,413

 
5,811

 
1,039

 
(11,954
)
 
37,309

Identifiable assets (2)
 
424,155

 
44,759

 
46,157

 
37,544

 
552,615

Depreciation and amortization
 
16,140

 
392

 
5,268

 
30

 
21,830

Interest
 
865

 

 
511

 
223

 
1,599

Capital expenditures
 
6,460

 
627

 
167

 
4

 
7,258

Non-cash compensation
 
772

 
472

 
127

 
2,777

 
4,148

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
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 (3)
 
32,222

 
(4,862
)
 
1,294

 
(7,505
)
 
21,149

Identifiable assets (2)
 
411,577

 
33,046

 
54,301

 
44,832

 
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


(1) 
Includes interest expense, compensation, professional fees, and other general and administrative expenses related to the Corporate segment.

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

(3) 
The following table reconciles income (loss) before income taxes for the three and nine months ended September 30, 2017 and 2016 to EBITDA, as adjusted.
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
 
2017
 
2016
 
2017
 
2016
Income (loss) before income taxes
 
$
4,657

 
$
(6,911
)
 
$
1,326


$
(14,872
)
Adjustments:
 
  

 
  

 
  

 
  

Interest income
 
(115
)
 
(184
)
 
(315
)
 
(479
)
Change in fair value of contingent consideration
 
3

 
72

 
(86
)
 
178

Interest expense
 
601

 
1,133

 
1,599


3,512

Depreciation and amortization
 
7,104

 
7,014

 
21,830


21,130

Non-cash compensation expense
 
1,341

 
1,300

 
4,148


3,996

Amortization of retention and forgivable loans
 
1,808

 
1,403

 
5,070


4,381

Financial advisor recruiting expense
 
744

 
514

 
2,176


1,191

Acquisition-related expense
 
55

 
936

 
320


1,003

Loss attributable to noncontrolling interest
 
(3
)
 
1

 
5


33

Other (1)
 
467

 
286