Quarterly report pursuant to Section 13 or 15(d)

Revenue from Contracts with Customers

v3.8.0.1
Revenue from Contracts with Customers
3 Months Ended
Mar. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue from Contracts with Customers
Revenue from Contracts with Customers

The Company adopted ASC 606, effective January 1, 2018, using the modified retrospective method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of shareholders' equity and other affected accounts at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under the accounting standards in effect for prior periods.

Performance Obligations

Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring promised goods or services to customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for those promised goods or services.

The following provides detailed information on the recognition of the Company's revenue from contracts with customers:

Broker Dealer Commissions

The Company’s broker-dealer subsidiaries earn commissions by executing client transactions in stocks, mutual funds, variable annuities and other financial products and services. Commissions revenue is recognized on trade date when the performance obligation is satisfied. Commissions revenue is paid on settlement date, which is generally two business days after trade date for equities securities and corporate bond transactions and one business day for government securities and commodities transactions. The Company records a receivable on the trade date and receives a payment on settlement date.

Insurance Commissions

The Company’s performance obligation with respect to each contract is the sale of the insurance policy. Insurance commissions revenue includes an initial up-front (first year) commission as well as annual trailing commission payments for each policy renewal. Commissions on insurance renewal premiums are considered variable consideration. ASC 606 requires that, at the time of the initial sale of a policy, the Company must estimate the variable consideration (future renewal commissions) and determine the transaction price as the unconstrained net present value of expected future renewal commissions.

Therefore, the transaction price includes the first year fixed commission and the variable consideration for the trailing commissions, estimated using the expected value method and a portfolio approach. Previously, the Company recognized trailing commissions as cash was received. The Company also estimates a reduction of the transaction price for possible future chargebacks. The Company controls the insurance services provided to the carriers and acts as a principal in providing insurance services to its customers. Accordingly, the Company records the first year and trailing commissions revenue on a gross basis when each policy is bound as an enforceable contract. Previously, the Company recorded revenue on a gross or net basis depending on how cash was received.

Advisory Fees

Advisory fee revenue represents fees charged by registered investment advisors (“RIAs”) to their clients based upon the value of client assets under management (“AUM”). The Company records fees charged to clients as advisory fees where the Company considers itself to be the primary RIA. The Company determined that the primary RIA firm is the principal in providing advisory services to clients and will therefore recognize the corresponding advisory fee revenues on a gross basis when the advisory services are conducted using the Company's corporate RIA platform.

As a result, the portion of the advisory fees paid to the client's independent financial advisor are classified as commissions and fees expense in the condensed consolidated statements of operations.

Certain independent financial advisors conduct their advisory business through their own RIA firm, rather than using one of the Company's corporate RIA subsidiaries. These independent entities, or Hybrid RIAs, engage the Company for clearing, regulatory and custody services, as well as for access to investment advisory platforms. The advisory fee revenue generated by these Hybrid RIAs is earned by the independent financial advisors, and is not included in the Company's advisory fee revenues. However, the Company charges separate fees to Hybrid RIAs for technology, custody and administrative services based on the AUM within the client’s accounts. These fees are recognized on a net basis and classified as advisory fees in the condensed consolidated statements of operations. Historically, we have generally recognized advisory fee revenue on a gross basis based on the fees charged by the independent financial advisors to their clients. Accordingly, our reported advisory revenue and the independent financial advisors’ compensation in our independent advisory and brokerage services segment is materially lower in 2018 as compared to the prior year periods and reported advisory revenue growth may lag behind the overall growth rate of advisory assets.

Investment Banking

Investment banking revenues consist of underwriting revenue, strategic advisory revenue and private placement fees.

Underwriting
The performance obligation is the consummation of the sale of securities for each contract with a customer. The transaction price includes fixed management fees and is recognized as revenue when the performance obligation is satisfied, generally the trade date. Where Ladenburg is the lead underwriter, revenue and expenses will be first allocated to other members of a syndicate because Ladenburg is acting as an agent for the syndicate. Accordingly, the Company records revenue on a net basis. When Ladenburg is not the lead underwriter, Ladenburg will recognize its share of revenue and expenses on a gross basis, because Ladenburg is acting as the principal. Under accounting standards in effect for prior periods, the Company recognized all underwriting revenue on a net basis.

Strategic Advisory Services
Performance obligations in these arrangements vary dependent on the contract, but are typically satisfied upon completion of the arrangement. Transaction fees may include retainer, management, and/or success fees, which are recognized upon completion of a deal. Under the accounting standards in effect for prior periods, retainer fees were deferred and amortized over the estimated duration of the engagement. Ladenburg controls the service as it is transferred to the customer, and is therefore acting as a principal. Accordingly, the Company records revenues and out-of-pocket reimbursements on a gross basis, consistent with practice under the accounting standards in effect for those periods, except for out-of-pocket reimbursements previously presented on a net basis.

Private Placement
The performance obligation is the consummation of the sale of securities for each contract with a customer. The transaction price includes fixed management fees and is recognized as revenue when the performance obligation is satisfied, generally the trade date. Ladenburg controls the service as it is transferred to the customer, and is therefore acting as a principal.

Accordingly, the Company records revenues and out-of-pocket reimbursements on a gross basis, consistent with practice under the accounting standards in effect for those periods, except for out-of-pocket reimbursements previously presented on a net basis.

Service Fees

Service fees principally includes amounts charged to independent financial advisors for processing of securities trades and for providing administrative and compliance services. Also, the Company's subsidiaries earn fees from their cash sweep programs, in which clients' cash deposits in their brokerage accounts are swept into interest-bearing deposit accounts at various third-party banks.

Disaggregation of Revenue

In the following table, revenue is disaggregated by service line and segment:
For the Three Months Ended March 31, 2018
 
Independent Advisory and Brokerage Services
 
Ladenburg
 
Insurance Brokerage
 
Corporate
 
Total
Commissions
 
$
129,745

 
$
3,213

 
$
30,328

 
$

 
$
163,286

Advisory fees
 
112,513

 
1,816

 

 
54

 
114,383

Investment banking
 
116

 
16,374

 

 

 
16,490

Principal transactions
 
11

 
156

 

 

 
167

Interest and dividends
 
534

 
75

 

 
178

 
787

Service fees
 
24,140

 
568

 

 
194

 
24,902

Other income
 
8,470

 
112

 
732

 
55

 
9,369

Total revenues
 
$
275,529

 
$
22,314

 
$
31,060

 
$
481

 
$
329,384



Contract Balances

For each of its insurance policies, the Company receives an initial up-front (first year) commission as well as annual trailing commission payments for each policy renewal. The Company will incur commission expenses related to the trailing commission payments for each policy renewal as well. The timing of revenue recognition, cash collections, and commission expense on the insurance policies results in contract assets and contract liabilities.
The following table provides information about contract assets and contract liabilities from contracts with customers. Estimated trailing commissions are included in other receivables, net while estimated expenses on trailing commissions are included in commissions and fees payable on the condensed consolidated statement of financial position:
 
 
As of March 31, 2018
 
As of January 1, 2018 (Adoption Date)
Contract assets - Insurance trailing commissions
 
$
62,178

 
$
58,786

Contract liabilities - Insurance trailing commissions
 
32,571

 
29,395



Performance obligations related to insurance brokerage revenue are considered satisfied when the sale of the initial insurance policies are completed, including expected future trailing commissions due to the Company each year upon customer renewals of the policies sold. Upon receipt of the annual trailing commission, the Company pays a corresponding commission expense. Based on historical data, customer renewal periods are estimated at approximately eight years from the sale of the initial policy. Accordingly, all contract asset and liabilities associated with trailing insurance commissions are considered long-term, except for the renewals expected in the next twelve-month period which approximate $22,000 in contract assets and $11,000 in contract liabilities.
Increases to the contract asset were a result of $6,406 in estimated trailing commissions from new policies during the three months ended March 31, 2018, while decreases were driven by $3,014 in actual commissions received. Increases to the contract liability were a result of $3,209 in estimated commission expense from new policies during the three months ended March 31, 2018, while decreases were driven by $33 in actual commissions paid.
Costs to Obtain a Contract with a Customer

The Company capitalizes the incremental costs of obtaining a contract with a customer (independent financial advisor) if the costs (1) relate directly to an existing contract or anticipated contract, (2) generate or enhance resources that will be used to satisfy performance obligations in the future, and (3) are expected to be recovered. These costs are included in contract acquisition costs, net in the condensed consolidated statements of financial condition and will be amortized over the estimated customer relationship period.
The Company uses an amortization method that is consistent with the pattern of transfer of goods or services to its customers. Any costs that are not incremental costs of obtaining a contract with a customer, such as costs of onboarding, training and support of independent financial advisors, would not qualify for capitalization.
The Company pays fees to third-party recruiters and bonuses to employees for recruiting independent financial advisors to affiliate with the Company's independent advisory and brokerage subsidiaries, and thereby bring their client’s accounts to the Company, which generates ongoing advisory fee revenue, commissions revenue, and monthly service fee revenue to the Company.
An additional cost to obtain an independent financial advisor may include forgivable loans. Forgivable loans take many forms, but they are differentiated by the fact that at inception the loan is intended to be forgiven over time by the Company. The loans are given as an inducement to attract independent financial advisors to become affiliated with the Company's independent advisory and brokerage subsidiaries. Each of the Company’s independent advisory and brokerage subsidiaries may offer new independent financial advisors a forgivable loan as part of his/her affiliation offer letter. These amounts are paid upfront and are capitalized, then amortized over the expected useful lives of the independent financial advisor’s relationship period with the independent advisory and brokerage firm.
The balance of contract acquisition costs, net, was $73,234 as of March 31, 2018, an increase of $11,894 compared to the adoption date of January 1, 2018. Amortization on these contract acquisition costs was $2,210 during the three months ended March 31, 2018. There were no impairments or changes to underlying assumptions related to contract acquisition costs, net, for the period.
Transaction Price Allocated to Remaining Performance Obligation

Contract liabilities represent accrued commission expense associated with the accrued insurance trailing commission contract assets. The Company does not have any contract liabilities representing revenues that will be recognized in future periods upon the satisfaction of any remaining performance obligations.
Practical Expedients

The following practical expedients available under the modified retrospective method were applied upon adoption of ASC 606:

1.
We applied the practical expedient outlined under ASC 606-10-65-1(h), and did not restate contracts that were completed contracts as of the date of initial application, i.e. January 1, 2018.

2.
We applied the practical expedient outlined under ASC 606-10-65-1(f)(4) and did not separately evaluate the effects of contract modifications. Instead, we reflect the aggregate effect of all the modifications that occurred before the initial application date, i.e. January 1, 2018.

3.
We applied the practical expedient outlined under ASC 606-10-10-4 that allows for the accounting for incremental costs of obtaining contracts at a portfolio level in order to determine the amortization period.

4.
We applied the practical expedient outlined under ASC 340-40-25-4 and did not capitalize the incremental costs to obtain a contract if the amortization period for the asset is one year or less.

Impacts on Financial Statements on January 1, 2018

The following table summarizes the impacts of ASC 606 adoption on the Company’s condensed consolidated statement of financial condition as of January 1, 2018.

The Company adjusted notes receivable from financial advisors, net by reclassifying all of its forgivable loans to contract acquisition costs, net in the condensed consolidated statements of financial position. Previously, forgivable loans were amortized based on their legal terms, typically forgiven over periods ranging from 3 to 7 years as long as the associated independent financial advisor remained in compliance with the terms of the forgivable loan. Under ASC 606, the acquisition costs, net are amortized over the expected useful lives of the independent financial advisors’ relationship period with the Company.

The Company adjusted intangible assets, net by eliminating a portion of net intangible asset that was created through the Company’s acquisition of Highland in 2014. ASC 606 requires that, at the time of the initial sale of a policy, the Company must estimate the variable consideration (future renewal commissions) and determine the transaction price as the unconstrained net present value of expected future renewal commissions. As such, the Company accelerated the revenues recognized under its insurance policies and recorded an increase to other receivables, net that was offset by the partial elimination of the net intangible asset and an increase to commissions and fees payable.









Condensed Consolidated Statement of Financial Condition
 
 
 
 
 
 
 
 
 
As Reported
 
Adjustments
 
Adjusted
 
 
December 31, 2017
 
Investment Banking
Insurance Renewals
Costs to obtain or fulfill a contract
 
January 1, 2018
ASSETS
 
(Audited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
172,103

 



 
$
172,103

Securities owned, at fair value
 
3,881

 



 
3,881

Receivables from clearing brokers
 
48,543

 



 
48,543

Receivables from other broker-dealers
 
2,822

 



 
2,822

Notes receivable from financial advisors, net
 
47,369

 


(40,566
)
 
6,803

Other receivables, net
 
60,707

 
(137
)
58,786


 
119,356

Fixed assets, net
 
23,621

 



 
23,621

Restricted assets
 
760

 



 
760

Intangible assets, net
 
103,611

 

(23,645
)

 
79,966

Goodwill
 
124,210

 



 
124,210

Contract acquisition costs, net
 

 


61,340

 
61,340

Cash surrender value of life insurance
 
12,711

 



 
12,711

Other assets
 
31,687

 
25

$


 
31,712

 
 
 
 
 
 
 
 
 
Total assets
 
$
632,025

 
$
(112
)
$
35,141

$
20,774

 
$
687,828

 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 



 

 
 
 
 
 
 
 
 
 
Securities sold, but not yet purchased, at fair value
 
$
231

 



 
$
231

Accrued compensation
 
33,343

 
(110
)


 
33,233

Commissions and fees payable
 
67,221

 

29,395


 
96,616

Accounts payable and accrued liabilities
 
40,478

 
(104
)

(1,133
)
 
39,241

Deferred rent
 
2,151

 



 
2,151

Deferred income taxes
 
2,968

 
28

1,489

2,118

 
6,603

Deferred compensation liability
 
18,161

 



 
18,161

Accrued interest
 
232

 



 
232

Notes payable
 
96,849

 



 
96,849

Total liabilities
 
$
261,634

 
$
(186
)
$
30,884

$
985

 
$
293,317

 
 
 
 
 
 
 
 
 
Commitments and contingencies
 

 



 

Shareholders' equity:
 

 



 

Preferred stock
 
$
2

 



 
$
2

Common stock
 
20

 



 
20

Additional paid-in capital
 
520,135

 



 
520,135

Accumulated deficit
 
(149,778
)
 
74

4,257

19,778

 
(125,669
)
 
 
 
 
 
 
 
 
 
  Total shareholders equity of the Company
 
370,379

 
74

4,257

19,778

 
394,488

 
 
 
 
 
 
 
 
 
Noncontrolling interest
 
12

 


11

 
23

 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
370,391

 
74

4,257

19,789

 
394,511

 
 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
632,025

 
$
(112
)
$
35,141

$
20,774

 
$
687,828



Impacts on Financial Statements at March 31, 2018

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

Condensed Consolidated Statement of Financial Condition
 
 
 
 
 
 
 
As of March 31, 2018
 
 
 
 
As Reported
 
Balances without the adoption of ASC 606
 
Effects of Change Higher/(Lower)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
145,417

 
$
145,417

 
$

Securities owned, at fair value
 
4,104

 
4,104

 

Receivables from clearing brokers
 
55,842

 
55,842

 

Receivables from other broker-dealers
 
2,263

 
2,263

 

Notes receivable from financial advisors, net
 
6,522

 
57,038

 
(50,516
)
Other receivables, net
 
122,154

 
60,231

 
61,923

Fixed assets, net
 
23,886

 
23,886

 

Restricted assets
 
760

 
760

 

Intangible assets, net
 
76,131

 
98,463

 
(22,332
)
Goodwill
 
124,210

 
124,210

 

Contract acquisition costs, net
 
73,234

 

 
73,234

Cash surrender value of life insurance
 
12,691

 
12,691

 

Other assets
 
36,941

 
36,586

 
355

 
 
 
 
 
 
 
Total assets
 
$
684,155

 
$
621,491

 
$
62,664

 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold, but not yet purchased, at market value
 
$
235

 
$
235

 
$

Accrued compensation
 
18,828

 
18,816

 
12

Commissions and fees payable
 
95,937

 
63,366

 
32,571

Accounts payable and accrued liabilities
 
52,205

 
51,874

 
331

Deferred rent
 
2,571

 
2,571

 

Deferred income taxes
 
6,532

 
2,631

 
3,901

Deferred compensation liability
 
18,340

 
18,340

 

Accrued interest
 
261

 
261

 

Notes payable
 
98,997

 
98,997

 

Total liabilities
 
$
293,906

 
$
257,091

 
$
36,815

 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
Sharedholders' equity:
 
 
 
 
 
 
Preferred stock
 
2

 
2

 

Common stock
 
20

 
20

 

Additional paid-in capital
 
510,409

 
510,409

 

Accumulated deficit
 
(120,206
)
 
(146,044
)
 
25,838

 
 
 
 
 
 
 
  Total shareholders equity of the Company
 
390,225

 
364,387

 
25,838

 
 
 
 
 
 
 
Noncontrolling interest
 
24

 
13

 
11

 
 
 
 
 
 
 
Total shareholders' equity
 
390,249

 
364,400

 
25,849

 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
684,155

 
$
621,491

 
$
62,664




Condensed Consolidated Statement of Operations
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
As Reported
 
Amounts without the adoption of ASC 606
 
Effects of Change Higher/(Lower)
Revenues:
 
 
 
 
 
 
Commissions
 
$
163,286

 
$
146,038

 
$
17,248

Advisory fees
 
114,383

 
163,927

 
(49,544
)
Investment banking
 
16,490

 
15,146

 
1,344

Principal transactions
 
167

 
193

 
(26
)
Interest and dividends
 
787

 
781

 
6

Service fees
 
24,902

 
24,902

 

Other income
 
9,369

 
9,463

 
(94
)
Total revenues
 
329,384

 
360,450

 
(31,066
)
Expenses:
 

 

 
 
Commissions and fees
 
231,311

 
263,822

 
(32,511
)
Compensation and benefits
 
47,249

 
47,486

 
(237
)
Non-cash compensation
 
1,494

 
1,494

 

Brokerage, communication and clearance fees
 
5,319

 
5,071

 
248

Rent and occupancy, net of sublease revenue
 
2,493

 
2,493

 

Professional services
 
5,018

 
4,636

 
382

Interest
 
1,866

 
1,866

 

Depreciation and amortization
 
5,809

 
7,123

 
(1,314
)
Acquisition-related expenses
 
913

 
913

 

Amortization of retention and forgivable loans
 
76

 
3,156

 
(3,080
)
Amortization of contract acquisition costs
 
2,210

 

 
2,210

Other
 
17,929

 
18,071

 
(142
)
Total expenses
 
321,687

 
356,131

 
(34,444
)
Income before item shown below
 
7,697

 
4,319

 
3,378

Change in fair value of contingent consideration
 
(61
)
 
(61
)
 

Income before income taxes
 
7,636

 
4,258

 
3,378

Income tax expense
 
2,172

 
521

 
1,651

Net income
 
5,464

 
3,737

 
1,727

Net income attributable to noncontrolling interest
 
1

 
1

 

Net income attributable to the Company
 
$
5,463

 
$
3,736

 
$
1,727

Dividends declared on preferred stock
 
(8,508
)

(8,508
)
 

Net loss available to common shareholders
 
$
(3,045
)

$
(4,772
)
 
$
1,727

 
 
 
 
 
 
 
Net loss per common share available to common shareholders (basic)
 
$
(0.02
)

$
(0.02
)
 
$

Net loss per common share available to common shareholders (diluted)
 
$
(0.02
)

$
(0.02
)
 
$

Weighted average common shares used in computation of per share data:
 
 
 
 
 
 
Basic
 
195,898,794


195,898,794

 

Diluted
 
195,898,794


195,898,794