NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Amounts 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, Triad Advisors (‘‘Triad’’), Investacorp, KMS Financial Services (“KMS”), Securities Service Network (“SSN”), Ladenburg Thalmann & Co. (‘‘Ladenburg’’), Ladenburg Thalmann Asset Management (‘‘LTAM’’), Premier Trust (‘‘Premier Trust’’) and Highland Capital Brokerage (“Highland”).
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. Highland also 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 is subject to regulation by various regulatory bodies, including state attorneys general and insurance departments. Premier Trust is subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division.
Basis of Presentation
The condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Because of the nature of the Company’s business, interim period results may not be indicative of full year or future results.
The unaudited condensed consolidated financial statements do not include all information and notes required in annual audited financial statements in conformity with GAAP. The statement of financial condition at December 31, 2018 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, 2018 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.
New Accounting Standards Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 Company adopted the provisions of Topic 842 on January 1, 2019, using the modified retrospective approach and the option presented under ASU 2018-11 to transition only active leases as of January 1, 2019. All comparative periods prior to January 1, 2019 are not adjusted and continue to be reported in accordance with Topic 840.
The Company elected to utilize the transition package of practical expedients permitted within the new standard, which among other things, allowed the Company to carryforward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the Company’s Consolidated Statements of Financial Condition which resulted in recognizing those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. The Company did not elect the hindsight practical expedient when determining the lease terms.
Adoption of the new standard resulted in the recording of right-of-use assets and corresponding lease liabilities of $36,522 and $39,483, respectively, as of January 1, 2019. The difference between the right-of-use assets and the lease liabilities was recorded to eliminate existing deferred rent balances recorded under Topic 840. The adoption of the new standard did not materially impact the Company's Consolidated Statements of Operations and had no impact on the Company's Consolidated Statements of Cash Flows. The Company's current lease arrangements expire through 2030. See Note 4 for further information.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees by aligning the accounting with the requirements for employee share-based compensation. ASU 2018-07 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2018-07 was effective January 1, 2019 and did not have any impact on the consolidated financial statements.
Accounting Standards Issued, But Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU amends the requirement on the measurement and recognition of expected credit losses for financial assets held. The ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted, but not earlier than annual and interim periods beginning after December 15, 2018. This amendment should be applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is in the process of assessing the impact of this ASU on its 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 Company has not elected to early adopt ASU 2017-04. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
The update eliminates the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and introduces a requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company plans to adopt this new accounting standard on January 1, 2020. Adoption is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
2. Revenue from Contracts with Customers
The Company adopted ASU 2014-09 and all related amendments ("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 applied its provisions to all uncompleted contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to increase the opening balance of retained earnings by $24,109. During the fourth quarter of 2018, the Company determined that the deferred tax liability recorded on adoption of ASC 606 with respect to Highland was overstated, and the Company made an additional retained earnings adjustment of $665 to correct this item as of January 1, 2018.
Performance Obligations
Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring promised goods or services to customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for those promised goods or services. Revenues are also analyzed to determine whether the Company acts as the principal (i.e. reports revenue on a gross basis) or agent (i.e. reports revenue on a net basis) in the arrangement with the customer. Principal or agent designations depend primarily on the control an entity has over the product or service before control is transferred to a customer. The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred and discretion in establishing the price.
The following provides detailed information on the recognition of the Company's revenue from contracts with customers:
Broker-Dealer Commissions
The Company’s broker-dealer subsidiaries earn commissions by executing client transactions in stocks, mutual funds, variable annuities and other financial products and services as well as from trailing commissions which are variable. Commissions revenue is recognized at the point of sale on the trade date when the performance obligation is satisfied. Commissions revenue is paid on settlement date, which is generally two business days after trade date for equities securities and corporate bond transactions and one business day for government securities and commodities transactions. The Company records a receivable on the trade date and receives a payment on settlement date. For trailing commissions, the performance obligation is satisfied at the time of the execution of the investments but the amount to be received for trailing commissions is uncertain, as it is dependent on the value of the investments at future points in time as well as the length of time the investor holds the investments, both of which are highly susceptible to variable factors outside the Company's influence. The Company does not believe that it can overcome this constraint until the market value of the investment and the investor activities are known, which are usually monthly or quarterly. The Company's Consolidated Statements of Operations reflects trailing commissions for services performed and performance obligations satisfied in previous periods and are recognized in the period that the constraint is overcome, when clients' investment holdings and their market values become known.
The Company's broker-dealer subsidiaries act as principal in satisfying the performance obligations that generate commissions revenue and maintain relationships with the product sponsors.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
The Company's independent financial advisors assist the Company in performing its obligations. Accordingly, broker-dealer commissions revenue are presented on a gross basis.
Insurance Commissions
The Company’s performance obligation with respect to each contract with its customer, the insurance carriers, is the sale of the insurance policies to clients. Insurance commissions revenue is received from insurance carriers and includes an initial up-front (first year) commission as well as annual trailing commission payments for each policy renewal. Commissions on insurance renewal premiums are considered variable consideration.
ASC 606 requires that, at the time of the initial sale of a policy, the Company must estimate the variable consideration (future renewal commissions) and determine the transaction price as the undiscounted sum of expected future renewal commissions to be received from the insurance carriers.
Therefore, the transaction price includes the first-year fixed commission and the variable consideration for the trailing commissions, estimated using the expected value method and a portfolio approach. The Company also estimates a reduction of the transaction price for possible future chargebacks from the carriers. The Company acts as principal in its relationship with the insurance carriers and receives commissions revenue for the sale of insurance products for the insurance carriers. The Company's financial advisors assist the Company in performing its obligations and act as an agent for the Company. Accordingly, the Company presents the first-year and trailing commissions revenue on a gross basis when each policy is bound as an enforceable contract.
Advisory Fees
Advisory fee revenue represents fees charged by registered investment advisors (“RIAs”) to their clients based upon the value of client assets under management (“AUM”). The Company records fees charged to clients as advisory fees where the Company considers itself to be the primary RIA. The Company determined that the primary RIA firm is the principal in providing advisory services to clients and will therefore recognize the corresponding advisory fee revenues on a gross basis when the advisory services are conducted using the Company's corporate RIA platform.
As a result, the portion of the advisory fees paid to the client's independent financial advisor are classified as commissions and fees expense in the consolidated statements of operations.
Certain independent financial advisors conduct their advisory business through their own RIA firm, rather than using one of the Company's corporate RIA subsidiaries. These independent entities, or Hybrid RIAs, engage the Company for clearing, regulatory and custody services, as well as for access to investment advisory platforms. The advisory fee revenue generated by these Hybrid RIAs is earned by the independent financial advisors, and is not included in the Company's advisory fee revenues. However, the Company charges separate fees to Hybrid RIAs for technology, custody and administrative services based on the AUM within the client’s accounts. These fees are recognized on a net basis and classified as advisory fees in the consolidated statements of operations. Accordingly, 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 are 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 recognizes its share of revenue and expenses on a gross basis, because Ladenburg is acting as the principal.
Strategic Advisory Services
Performance obligations in these arrangements vary dependent on the contract, but are typically satisfied upon
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
completion of the arrangement. Transaction fees may include retainer, management, and/or success fees, which are recognized upon completion of a deal. 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.
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.
Service Fees
Service fees primarily include (1) amounts charged to independent financial advisors for securities trades and for providing administrative and compliance services; and (2) fees earned for arranging the cash sweep programs between the customers and the third-party banks, in which customers' cash deposits in their brokerage accounts at the customers' direction are swept into interest-bearing FDIC-insured deposit accounts at various third-party banks.
The service fees charged to independent financial advisors are recognized when the Company satisfies its performance obligations. Transaction revenues for the processing of securities trades are recognized at the point-in-time that a transaction is executed, which is generally the trade date. Fees charged to advisors for providing administrative and compliance services are either recognized at a point-in-time to over time depending on whether the service is provided at an identifiable point-in-time or if the service is provided continually over the the year. The cash sweep fees are earned and recognized over the period of the clients' participation in these programs.
Other Income
The Company receives fees from distributors of certain products sold by financial advisors affiliated with the Company's independent advisory and brokerage subsidiaries. These fees are for marketing support and sales force education and training efforts. Compensation for these performance obligations is generally calculated as a fixed fee, as a percentage of the average annual amount of product sponsor assets held in advisors' clients' accounts, as a percentage of new sales, or a combination. As the value of product sponsor assets held in advisor's clients' accounts is susceptible to unpredictable market changes, fees based on asset levels or sales include variable consideration and are constrained until the date that the fees are determinable. The Company is the principal in these arrangements as it is responsible for and determines the level of servicing and marketing support it provides to the product sponsors.
In addition, the Company's independent advisory and brokerage subsidiaries host certain advisor conferences that serve as training, education, sales, and marketing events, for which a fee may be charged for attendance to advisors and product sponsors. Recognition is at a point-in-time when the conference is held and the Company satisfies its performance obligations.
Disaggregation of Revenue
In the following table, revenue is disaggregated by service line and segment:
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2019
|
|
Independent Advisory and Brokerage Services
|
|
Ladenburg
|
|
Insurance Brokerage
|
|
Corporate
|
|
Total
|
Commissions
|
|
$
|
133,904
|
|
|
$
|
2,087
|
|
|
$
|
44,404
|
|
|
$
|
—
|
|
|
$
|
180,395
|
|
Advisory fees
|
|
130,464
|
|
|
2,299
|
|
|
—
|
|
|
—
|
|
|
132,763
|
|
Investment banking
|
|
238
|
|
|
18,454
|
|
|
—
|
|
|
—
|
|
|
18,692
|
|
Principal transactions
|
|
7
|
|
|
(237
|
)
|
|
—
|
|
|
(28
|
)
|
|
(258
|
)
|
Interest and dividends
|
|
650
|
|
|
263
|
|
|
—
|
|
|
561
|
|
|
1,474
|
|
Service fees
|
|
30,318
|
|
|
551
|
|
|
—
|
|
|
268
|
|
|
31,137
|
|
Other income
|
|
9,623
|
|
|
102
|
|
|
510
|
|
|
94
|
|
|
10,329
|
|
Total revenues
|
|
$
|
305,204
|
|
|
$
|
23,519
|
|
|
$
|
44,914
|
|
|
$
|
895
|
|
|
$
|
374,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2018
|
|
Independent Advisory and Brokerage Services
|
|
Ladenburg
|
|
Insurance Brokerage
|
|
Corporate
|
|
Total
|
Commissions
|
|
$
|
137,054
|
|
|
$
|
2,590
|
|
|
$
|
32,464
|
|
|
$
|
—
|
|
|
$
|
172,108
|
|
Advisory fees
|
|
122,848
|
|
|
1,644
|
|
|
—
|
|
|
58
|
|
|
124,550
|
|
Investment banking
|
|
129
|
|
|
10,038
|
|
|
—
|
|
|
(185
|
)
|
|
9,982
|
|
Principal transactions
|
|
(2
|
)
|
|
48
|
|
|
—
|
|
|
(1
|
)
|
|
45
|
|
Interest and dividends
|
|
700
|
|
|
185
|
|
|
—
|
|
|
549
|
|
|
1,434
|
|
Service fees
|
|
27,868
|
|
|
635
|
|
|
—
|
|
|
199
|
|
|
28,702
|
|
Other income
|
|
11,418
|
|
|
40
|
|
|
496
|
|
|
100
|
|
|
12,054
|
|
Total revenues
|
|
$
|
300,015
|
|
|
$
|
15,180
|
|
|
$
|
32,960
|
|
|
$
|
720
|
|
|
$
|
348,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2019
|
|
Independent Brokerage and Advisory Services
|
|
Ladenburg
|
|
Insurance Brokerage
|
|
Corporate
|
|
Total
|
Commissions
|
|
$
|
396,949
|
|
|
$
|
7,161
|
|
|
$
|
122,966
|
|
|
$
|
—
|
|
|
$
|
527,076
|
|
Advisory fees
|
|
366,916
|
|
|
5,748
|
|
|
—
|
|
|
—
|
|
|
372,664
|
|
Investment banking
|
|
584
|
|
|
39,476
|
|
|
—
|
|
|
—
|
|
|
40,060
|
|
Principal transactions
|
|
19
|
|
|
1,403
|
|
|
—
|
|
|
(151
|
)
|
|
1,271
|
|
Interest and dividends
|
|
1,964
|
|
|
789
|
|
|
—
|
|
|
1,265
|
|
|
4,018
|
|
Service fees
|
|
93,237
|
|
|
1,716
|
|
|
—
|
|
|
774
|
|
|
95,727
|
|
Other income
|
|
30,355
|
|
|
470
|
|
|
1,723
|
|
|
203
|
|
|
32,751
|
|
Total revenues
|
|
$
|
890,024
|
|
|
$
|
56,763
|
|
|
$
|
124,689
|
|
|
$
|
2,091
|
|
|
$
|
1,073,567
|
|
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2018
|
|
Independent Brokerage and Advisory Services
|
|
Ladenburg
|
|
Insurance Brokerage
|
|
Corporate
|
|
Total
|
Commissions
|
|
$
|
407,159
|
|
|
$
|
8,739
|
|
|
$
|
99,877
|
|
|
$
|
—
|
|
|
$
|
515,775
|
|
Advisory fees
|
|
356,051
|
|
|
5,352
|
|
|
—
|
|
|
168
|
|
|
361,571
|
|
Investment banking
|
|
558
|
|
|
38,497
|
|
|
—
|
|
|
(854
|
)
|
|
38,201
|
|
Principal transactions
|
|
5
|
|
|
433
|
|
|
—
|
|
|
7
|
|
|
445
|
|
Interest and dividends
|
|
1,854
|
|
|
420
|
|
|
—
|
|
|
1,027
|
|
|
3,301
|
|
Service fees
|
|
78,780
|
|
|
1,822
|
|
|
—
|
|
|
587
|
|
|
81,189
|
|
Other income
|
|
30,608
|
|
|
351
|
|
|
2,068
|
|
|
2,506
|
|
|
35,533
|
|
Total revenues
|
|
$
|
875,015
|
|
|
$
|
55,614
|
|
|
$
|
101,945
|
|
|
$
|
3,441
|
|
|
$
|
1,036,015
|
|
Contract Balances
For each of its insurance policies, the Company receives an initial up-front (first year) commission as well as annual trailing commission payments for each policy renewal. The Company will incur commission expenses related to the trailing commission payments for each policy renewal as well. The timing of revenue recognition, cash collections, and commission expense on the insurance policies results in contract assets and contract liabilities.
The following table provides information about contract assets and contract liabilities from contracts with customers. Estimated trailing commissions are included in insurance trailing commissions receivable, net while estimated expenses on trailing commissions are included in commissions and fees payable on the condensed consolidated statement of financial condition:
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
As of December 31, 2018
|
Contract assets - Insurance trailing commissions
|
|
$
|
67,290
|
|
$
|
64,300
|
|
Contract liabilities - Insurance trailing commissions
|
|
32,630
|
|
31,854
|
|
Performance obligations related to insurance brokerage revenue are considered satisfied when the sale of the initial insurance policies are completed, including expected future trailing commissions due to the Company each year upon customer renewals of the policies sold. Upon receipt of the annual trailing commission, the Company pays a corresponding commission expense. Based on historical data, customer renewal periods are estimated at approximately eight years from the sale of the initial policy.
Increases to the contract asset were a result of $7,461 and $20,256 in estimated trailing commissions from new policies during the three and nine months ended September 30, 2019, respectively, while decreases were driven by $5,541 and $17,266 in actual commissions received during the three and nine months ended September 30, 2019, respectively. Increases to the contract liability were a result of $3,276 and $9,583 in estimated commission expense from new policies during the three and nine months ended September 30, 2019, respectively, while decreases were driven by $2,812 and $8,807 in actual commissions paid during the three and nine months ended September 30, 2019, respectively.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
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 are amortized over the estimated customer relationship period.
The Company uses an amortization method that is consistent with the pattern of transfer of goods or services to its customers. Any costs that are not incremental costs of obtaining a contract with a customer, such as costs of onboarding, training and support of independent financial advisors, would not qualify for capitalization.
The Company pays fees to third-party recruiters and bonuses to employees for recruiting independent financial advisors, and thereby bring their customers’ accounts to the Company, which generates ongoing advisory fee revenue, commissions revenue, and monthly service fee revenue to the Company.
An additional cost to obtain an independent financial advisor may include forgivable loans. Forgivable loans take many forms, but they are differentiated by the fact that at inception the loan is intended to be forgiven over time by the Company. The loans are given as an inducement to attract independent financial advisors to become affiliated with the Company's independent advisory and brokerage subsidiaries. Each of the Company’s independent advisory and brokerage subsidiaries may offer new independent financial advisors a forgivable loan as part of his/her affiliation offer letter. These amounts are paid upfront and are capitalized, then amortized over the expected useful lives of the independent financial advisor’s relationship period with the independent advisory and brokerage firm.
The balance of contract acquisition costs, net, was $86,520 as of September 30, 2019, an increase of $5,794 compared to December 31, 2018. Amortization on these contract acquisition costs was $8,639 during the nine months ended September 30, 2019. 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.
3. 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.
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.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
The following tables present the carrying values and estimated fair values at September 30, 2019 and December 31, 2018 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, 2019
|
Assets
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Total Estimated Fair Value
|
Cash and cash equivalents
|
|
$
|
251,033
|
|
|
$
|
251,033
|
|
|
$
|
—
|
|
|
$
|
251,033
|
|
Receivables from clearing brokers
|
|
27,835
|
|
|
—
|
|
|
27,835
|
|
|
27,835
|
|
Receivables from other broker-dealers
|
|
5,597
|
|
|
—
|
|
|
5,597
|
|
|
5,597
|
|
Notes receivables, net (1)
|
|
7,459
|
|
|
—
|
|
|
7,459
|
|
|
7,459
|
|
Other receivables, net
|
|
67,419
|
|
|
—
|
|
|
67,419
|
|
|
67,419
|
|
Insurance trailing commissions receivable
|
|
67,290
|
|
|
—
|
|
|
67,290
|
|
|
67,290
|
|
|
|
$
|
426,633
|
|
|
$
|
251,033
|
|
|
$
|
175,600
|
|
|
$
|
426,633
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
36,871
|
|
|
$
|
—
|
|
|
$
|
36,871
|
|
|
$
|
36,871
|
|
Commissions and fees payable
|
|
106,004
|
|
|
—
|
|
|
106,004
|
|
|
106,004
|
|
Accounts payable and accrued liabilities (2)
|
|
34,677
|
|
|
—
|
|
|
34,677
|
|
|
34,677
|
|
Accrued interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Notes payable, net (3)
|
|
315,898
|
|
|
—
|
|
|
333,145
|
|
|
333,145
|
|
|
|
$
|
493,450
|
|
|
$
|
—
|
|
|
$
|
510,697
|
|
|
$
|
510,697
|
|
(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 $2,520.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Assets
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Total Estimated Fair Value
|
Cash and cash equivalents
|
|
$
|
182,693
|
|
|
$
|
182,693
|
|
|
$
|
—
|
|
|
$
|
182,693
|
|
Receivables from clearing brokers
|
|
24,068
|
|
|
—
|
|
|
24,068
|
|
|
24,068
|
|
Receivables from other broker-dealers
|
|
7,078
|
|
|
—
|
|
|
7,078
|
|
|
7,078
|
|
Notes receivables, net (1)
|
|
5,809
|
|
|
—
|
|
|
5,809
|
|
|
5,809
|
|
Other receivables, net
|
|
68,942
|
|
|
—
|
|
|
68,942
|
|
|
68,942
|
|
Insurance trailing commissions receivable
|
|
64,300
|
|
|
|
|
64,300
|
|
|
64,300
|
|
|
|
$
|
352,890
|
|
|
$
|
182,693
|
|
|
$
|
170,197
|
|
|
$
|
352,890
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
39,264
|
|
|
$
|
—
|
|
|
$
|
39,264
|
|
|
$
|
39,264
|
|
Commissions and fees payable
|
|
105,306
|
|
|
—
|
|
|
105,306
|
|
|
105,306
|
|
Accounts payable and accrued liabilities (2)
|
|
46,511
|
|
|
—
|
|
|
46,511
|
|
|
46,511
|
|
Accrued interest
|
|
123
|
|
|
—
|
|
|
123
|
|
|
123
|
|
Notes payable, net (3)
|
|
254,072
|
|
|
—
|
|
|
266,844
|
|
|
266,844
|
|
|
|
$
|
445,276
|
|
|
$
|
—
|
|
|
$
|
458,048
|
|
|
$
|
458,048
|
|
(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 $2,230.
(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, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
Assets
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Estimated Fair Value
|
Certificates of deposit
|
|
$
|
289
|
|
|
$
|
289
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
289
|
|
Debt securities
|
|
627
|
|
|
—
|
|
|
627
|
|
|
—
|
|
|
627
|
|
U.S. treasury notes
|
|
711
|
|
|
—
|
|
|
711
|
|
|
—
|
|
|
711
|
|
Common stock and warrants
|
|
2,974
|
|
|
326
|
|
|
2,648
|
|
|
—
|
|
|
2,974
|
|
Total
|
|
$
|
4,601
|
|
|
$
|
615
|
|
|
$
|
3,986
|
|
|
$
|
—
|
|
|
$
|
4,601
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable
|
|
$
|
2,520
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,520
|
|
|
$
|
2,520
|
|
Debt securities
|
|
29
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
29
|
|
Common stock and warrants
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Total
|
|
$
|
2,555
|
|
|
$
|
6
|
|
|
$
|
29
|
|
|
$
|
2,520
|
|
|
$
|
2,555
|
|
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Assets
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Estimated Fair Value
|
Certificates of deposit
|
|
$
|
426
|
|
|
$
|
426
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
426
|
|
Debt securities
|
|
1,447
|
|
|
—
|
|
|
1,447
|
|
|
—
|
|
|
1,447
|
|
U.S. treasury notes
|
|
794
|
|
|
—
|
|
|
794
|
|
|
—
|
|
|
794
|
|
Common stock and warrants
|
|
8,256
|
|
|
7,070
|
|
|
1,186
|
|
|
—
|
|
|
8,256
|
|
Total
|
|
$
|
10,923
|
|
|
$
|
7,496
|
|
|
$
|
3,427
|
|
|
$
|
—
|
|
|
$
|
10,923
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable
|
|
$
|
2,230
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,230
|
|
|
$
|
2,230
|
|
Debt securities
|
|
196
|
|
|
—
|
|
|
196
|
|
|
—
|
|
|
196
|
|
Common stock and warrants
|
|
2,379
|
|
|
2,379
|
|
|
—
|
|
|
—
|
|
|
2,379
|
|
Total
|
|
$
|
4,805
|
|
|
$
|
2,379
|
|
|
$
|
196
|
|
|
$
|
2,230
|
|
|
$
|
4,805
|
|
As of September 30, 2019 and December 31, 2018, approximately $3,599 and $9,763, 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, 2019 and December 31, 2018, the fair values of the warrants were $959 and $1,052, 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 (the "Securities Act"), 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:
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
Fair value of contingent consideration as of December 31, 2017
|
|
$
|
2,104
|
|
Payments
|
|
(1,353
|
)
|
Change in fair value of contingent consideration
|
|
238
|
|
Fair value of contingent consideration in connection with KFG and FSFG acquisitions
|
|
1,241
|
|
Fair value of contingent consideration as of December 31, 2018
|
|
$
|
2,230
|
|
Change in fair value of contingent consideration
|
|
290
|
|
Fair value of contingent consideration as of September 30, 2019
|
|
$
|
2,520
|
|
4. Leases
The Company's lease agreements primarily cover office facilities and equipment and expire at various dates. The Company's leases are predominantly operating leases, which are included in right-of-use assets and lease liabilities on the Company's Condensed Consolidated Statements of Financial Condition. The Company's current lease arrangements expire from 2019 through 2030, some of which include options to extend or terminate the lease. However, the Company in general is not reasonably certain to exercise options to renew or terminate, and therefore renewal and termination options are not considered in the lease term or the right-of-use asset and lease liabilities balances.
The Company’s lease population does not include any residual value guarantees, and therefore none were considered in the calculation of the lease balances. The Company has leases with variable payments, most commonly in the form of common area maintenance charges which are based on actual costs incurred. These variable payments were excluded from the right-of-use asset and lease liability balances since they are not fixed or in-substance fixed payments. Leases with variable rate adjustments, such as Consumer Price Index (CPI) adjustments, were reflected based on contractual lease payments as outlined within the lease agreement and not adjusted for any CPI increases or decreases. The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient to account for lease and non-lease components as a single lease component.
For leases with terms greater than 12 months, right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its incremental borrowing rate. Our lease agreements generally do not provide a readily determinable implicit rate nor is it available to us from our lessors. Instead, the Company estimates the Company’s incremental borrowing rate based on information available at either the implementation date of Topic 842 or at lease commencement for leases entered into thereafter in determining the present value of future payments. Lease expense for net present value of payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the Condensed Consolidated Statements of Financial Condition; the Company recognizes lease expense for these leases on a straight-line basis over the term of the lease.
Lease cost. The Company’s components of lease cost for the three and nine months ended September 30, 2019 were as follows:
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
September 30, 2019
|
September 30, 2019
|
Operating lease cost
|
$
|
2,346
|
|
$
|
7,106
|
|
Short-term lease cost
|
89
|
|
146
|
|
Variable lease cost
|
194
|
|
676
|
|
Amortization of finance lease assets
|
31
|
|
91
|
|
Interest on finance lease liabilities
|
2
|
|
6
|
|
Sublease income
|
(25
|
)
|
(74
|
)
|
Total lease cost
|
$
|
2,637
|
|
$
|
7,951
|
|
Lease commitments. The table below summarizes the Company’s scheduled future minimum lease payments under operating and finance leases, recorded on the Condensed Consolidated Statements of Financial Condition as of September 30, 2019:
|
|
|
|
|
|
Operating and Finance Leases
|
Remainder of 2019
|
$
|
2,344
|
|
2020
|
8,218
|
|
2021
|
6,114
|
|
2022
|
5,339
|
|
2023
|
3,903
|
|
Thereafter
|
15,750
|
|
Total lease payments
|
41,668
|
|
Less imputed interest
|
(6,870
|
)
|
Present value of lease payments
|
$
|
34,798
|
|
As of September 30, 2019, the Company has additional operating leases, primarily for additional office space at Securities America, that have not yet commenced.
In connection with an office lease entered into in March 2016, Securities America has exercised an option to lease additional office space, which is under construction, for 12 years and would require the payment of an estimated average annual rent of $1,700 plus operating expenses, subject to certain adjustments. The Company currently expects that this lease would commence in 2020 upon completion of the construction. Such estimated rent amounts are not included in the total minimum lease payments above.
The table below presents additional information related to our leases as of September 30, 2019:
|
|
|
|
Weighted Average Remaining Lease Term:
|
|
Operating leases
|
7.04 years
|
|
|
|
Weighted Average Discount Rate:
|
|
Operating leases
|
4.42
|
%
|
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
Supplemental cash flow information. The table below presents supplemental cash flow information related to leases during the nine months ended September 30, 2019:
|
|
|
|
|
|
Nine months ended September 30, 2019
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
Operating cash flows from operating and finance leases
|
$
|
8,280
|
|
Non-cash investing and financing activities. The Right-of-use assets obtained in exchange for lease obligations during the nine months ended September 30, 2019 was:
|
|
|
|
|
|
Nine months ended September 30, 2019
|
Operating and finance leases
|
$
|
6,861
|
|
Subleases and lessor activity. The Company had rental income from subleasing activity during the period ended September 30, 2019 which was immaterial to the Company’s consolidated financial statements.
5. Intangible Assets
At September 30, 2019 and December 31, 2018, intangible assets subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Weighted-Average Estimated Useful Life (years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Technology
|
|
7.9
|
|
$
|
25,563
|
|
|
$
|
23,774
|
|
|
$
|
25,563
|
|
|
$
|
22,187
|
|
Relationships with financial advisors
|
|
14.3
|
|
126,122
|
|
|
67,430
|
|
|
126,122
|
|
|
59,584
|
|
Covenants not-to-compete
|
|
3.8
|
|
6,964
|
|
|
6,610
|
|
|
6,964
|
|
|
6,258
|
|
Trade names
|
|
7.7
|
|
16,921
|
|
|
14,860
|
|
|
16,916
|
|
|
14,472
|
|
Total
|
|
|
|
$
|
175,570
|
|
|
$
|
112,674
|
|
|
$
|
175,565
|
|
|
$
|
102,501
|
|
Aggregate amortization expense for the nine months ended September 30, 2019 and 2018 amounted to $10,173 and $11,552, respectively. The weighted-average amortization period for total amortizable intangibles at September 30, 2019 is 9.81 years. As of September 30, 2019, the remaining estimated amortization expense for each of the five succeeding years or remaining period of such, and thereafter is as follows:
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
Remainder of 2019
|
$
|
2,898
|
|
2020
|
11,466
|
|
2021
|
6,628
|
|
2022
|
6,555
|
|
2023
|
6,217
|
|
2024 - 2036
|
29,132
|
|
|
$
|
62,896
|
|
6. Notes Receivable from Financial Advisors
From time to time, the Company’s subsidiaries may make loans to their financial advisors. The notes receivable balance is comprised of unsecured non-interest-bearing and interest-bearing loans (interest of up to 10.0%) to the financial advisors. These notes have various schedules for repayment or forgiveness and mature at various dates through 2026.
The notes are amortized over the forgiveness period, which generally ranges from 3 to 5 years. Receivables are continually evaluated for collectability and possible write-offs and an allowance for doubtful accounts is provided where a loss is considered probable. As of September 30, 2019 and December 31, 2018, the allowance amounted to $1,585 and $1,528, respectively.
7. 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, 2019, each, had a $250 minimum net capital requirement.
At September 30, 2019, Securities America had regulatory net capital of $15,375, Triad had regulatory net capital of $9,690, Investacorp had regulatory net capital of $8,657, KMS had regulatory net capital of $7,534, SSN had regulatory net capital of $6,618 and Ladenburg had regulatory net capital of $23,428.
Each of Securities America, Triad, Investacorp, KMS, SSN and Ladenburg claim exemptions from the provisions of the SEC’s Rule 15c3-3 pursuant to paragraphs (k)(2)(i) and (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, 2019, Premier Trust had stockholders’ equity of $4,826, including at least $250 in cash.
8. 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, 2019, the estimated annual effective tax rate for 2019 (exclusive of discrete items) is approximately 28% of projected pre-tax income. Our estimated annual tax expense consists of a provision for federal and state and local income taxes.
For the three and nine months ended September 30, 2019, the Company recorded an income tax expense of $4,020 on pre-tax income of $15,297 and an income tax expense of $7,421 on a pre-tax income of $29,638. The estimated annual effective tax rate is higher than the statutory rate of 21% related primarily to state and local taxes and certain non-deductible expenses including meals and entertainment and IRC §162(m).
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
For the three and nine months ended September 30, 2018, the Company recorded an income tax expense of $3,207 on a pre-tax income of $12,657 and an income tax expense of $9,953 on a pre-tax income of $34,177.
In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized.
We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. As of September 30, 2019, the Company concluded that its deferred tax assets were realizable on a more-likely-than-not basis with the exception of certain separate company state net operating losses.
On January 1, 2018, the Company adopted ASC 606. Upon adoption, the Company recorded a net deferred tax liability of $3,600 with an offset to retained earnings. During the fourth quarter of 2018, the Company determined that the deferred tax liability recorded on adoption of ASC 606 with respect to Highland was overstated, and the Company made an additional retained earnings adjustment of $665 to correct this item as of January 1, 2018. As such, the net deferred tax liability related to ASC 606 is $2,935.
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Note payable under subsidiary's term loan with bank
|
$
|
5,728
|
|
|
$
|
—
|
|
Note payable under subsidiary's revolver with bank
|
—
|
|
|
89
|
|
Notes payable to Kestler Financial Group's former shareholders
|
5,242
|
|
|
5,399
|
|
Notes payable to Four Seasons Financial Group's former shareholders
|
290
|
|
|
364
|
|
6.5% Senior Notes, net of $61 and $67 of unamortized discount in 2019 and 2018, respectively
|
82,748
|
|
|
82,742
|
|
7% Senior Notes, net of $41 and $44 of unamortized discount in 2019 and 2018, respectively
|
42,479
|
|
|
42,475
|
|
7.25% Senior Notes
|
60,000
|
|
|
60,000
|
|
7.75% Senior Notes
|
57,500
|
|
|
—
|
|
7.25% December 2018 Notes, net of $5,779 and $6,261 of unamortized discount in 2019 and 2018, respectively
|
70,571
|
|
|
70,089
|
|
Less: Unamortized debt issuance costs
|
(8,660
|
)
|
|
(7,086
|
)
|
Total
|
$
|
315,898
|
|
|
$
|
254,072
|
|
The Company estimates that the fair value of notes payable was $333,145 at September 30, 2019 and $266,844 at December 31, 2018 based on then current interest rates at which similar amounts of debt could then be borrowed (Level 2 inputs). As of September 30, 2019, the Company was in compliance with all covenants in its debt agreements.
Senior Notes
On November 21, 2017, the Company sold $72,500 principal amount of its 6.5% senior notes due November 2027 ("6.5% Senior Notes") pursuant to an underwritten offering. Interest on the 6.5% Senior Notes accrues from November 21, 2017 and is paid quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The Company may redeem the 6.5% Senior Notes in whole or in part on or after November 30, 2020, at its option, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
On December 12, 2017, the underwriters exercised their option to purchase an additional $4,069 principal amount of the 6.5% Senior Notes, which resulted in total gross proceeds of $76,569, before deducting the underwriting discount paid to unaffiliated underwriters and offering expenses aggregating $3,313, including $1,187 of brokerage commissions earned by employees of Ladenburg, which served as the lead underwriter in the offering. In connection with the offering of 6.5% Senior Notes, certain members of the Company's management and Board of Directors purchased $10,400 of the 6.5% Senior Notes offered by the Company. In February 2018, the Company entered into a note distribution agreement under which the Company may sell up to $25,000 principal amount of additional 6.5% Senior Notes from time to time in an "at the market" offering in accordance with Rule 415 under the Securities Act. Ladenburg is acting as the representative of the agents named in the note distribution agreement in the "at the market" offering and may receive commissions of up to 2% of gross sales. During 2018, the Company sold $6,240 principal amount of 6.5% Senior Notes pursuant to the "at the market" offering. The Company did not sell any 6.5% Senior Notes pursuant to the "at the market" offering during the nine months ended September 30, 2019.
On May 22, 2018, the Company sold $40,000 principal amount of its 7% senior notes due May 2028 ("7% Senior Notes") pursuant to an underwritten offering. Interest on the 7% Senior Notes accrues from May 30, 2018 and is paid quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The Company may redeem the 7% Senior Notes in whole or in part on or after May 31, 2021, at its option, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest. On June 22, 2018, the underwriters exercised their option to purchase an additional $1,412 principal amount of the 7% Senior Notes, which resulted in total gross proceeds of $41,412, before deducting the underwriting discount paid to unaffiliated underwriters and offering expenses aggregating $2,020, including $464 of brokerage commissions earned by employees of Ladenburg, which served as the lead underwriter in the offering. In June 2018, the Company entered into a note distribution agreement under which the Company may sell up to $25,000 principal amount of additional 7% Senior Notes from time to time in an "at the market" offering. Ladenburg is acting as the representative of the agents named in the note distribution agreement in the "at the market" offering and may receive commissions of up to 2% of gross sales. During 2018, the Company sold $2,729 principal amount of 7% Senior Notes pursuant to the "at the market" offering. The Company did not sell any 7% Senior Notes pursuant to the "at the market" offering during the nine months ended September 30, 2019. At September 30, 2019, Ladenburg held $1,622 of 7% Senior Notes, which are not included in notes payable.
On August 9, 2018, the Company sold $60,000 principal amount of its 7.25% senior notes due September 2028 ("7.25% Senior Notes") pursuant to an underwritten offering. Interest on the 7.25% Senior Notes accrues from August 16, 2018 and is paid quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The Company may redeem the 7.25% Senior Notes in whole or in part on or after September 30, 2021 at its option, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest. The offering resulted in total gross proceeds of $60,000, before deducting the underwriting discount paid to unaffiliated underwriters and offering expenses aggregating $2,135, including $120 of brokerage commissions earned by employees of Ladenburg, which served as one of the five underwriters in the offering.
On May 29, 2019, the Company sold $57,500 principal amount of its 7.75% senior notes due June 2029 ("7.75% Senior Notes") pursuant to an underwritten offering. Interest on the 7.75% Senior Notes accrues from May 29, 2019 and is paid quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The Company may redeem the 7.75% Senior Notes in whole or in part on or after June 30, 2022 at its option, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest. The offering resulted in total gross proceeds of $57,500, before deducting the underwriting discount paid to unaffiliated underwriters and offering expenses aggregating $2,068.
Promissory Note - KFG
On August 31, 2018, as part of the consideration paid for the acquisition of Kestler Financial Group ("KFG"), the Company issued a promissory note (the "KFG Note") to the former shareholders of KFG in the aggregate principal amount of $5,450, bearing interest at 4.00% per annum and payable in equal monthly installments beginning on September 15, 2018, with the final installment being due and payable on or before November 15, 2036. The KFG Note may be prepaid in full or in part at any time without premium or penalty. The KFG Note contains customary events of default, which if uncured, entitle the holder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the KFG Note.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
Promissory Note - FSFG
In November 2018, as part of the consideration paid for the acquisition of Four Seasons Financial Group ("FSFG"), Highland issued two promissory notes (the "FSFG Notes") to the former shareholders of FSFG in the aggregate principal amount of $372, one bearing interest at 3.99% per annum and payable in equal monthly installments beginning on November 1, 2018, with the final installment being due and payable on or before October 1, 2021 and the other bearing interest at 4.75% per annum and payable in equal monthly installments beginning on November 15, 2018, with the final installment being due and payable on or before January 15, 2024. The FSFG Notes may be prepaid in full or in part at any time without premium or penalty. The FSFG Notes contains customary events of default, which if uncured, entitle the holder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the FSFG Notes.
Promissory Notes - December 2018 Notes
On December 24, 2018, the Company entered into an agreement (the “Repurchase Agreement”) with its former principal shareholder, Phillip Frost, M.D., and an entity affiliated with Dr. Frost, Frost Nevada Investments Trust (together with Dr. Frost, the “Sellers”), pursuant to which the Company agreed to repurchase 50,900,000 shares of its common stock directly from the Sellers (the “Share Repurchase”) in a private transaction at a price of $2.50 per share. The Company funded the Share Repurchase with $50,900 in cash on hand and by issuing $76,350 in aggregate principal amount of 7.25% Senior Notes due 2028 (the “December 2018 Notes”) to the Sellers. Also, under the Repurchase Agreement, options to purchase 3,610,000 shares of the Common Stock held by Dr. Frost were cancelled in exchange for $3,000 in cash.
The December 2018 Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The December 2018 Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries. The December 2018 Notes bear interest from December 24, 2018 at the rate of 7.25% per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2019, and at maturity. The December 2018 Notes mature on September 30, 2028.
The Company may, at its option, at any time and from time to time, on or after September 30, 2021, redeem the December 2018 Notes, in whole or in part, at a redemption price equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest to, but excluding, the date fixed for redemption. On and after any redemption date, interest will cease to accrue on the redeemed December 2018 Notes.
The December 2018 Notes contain exchange and resale registration rights that require the Company, at the written request of the note holders, to use commercially reasonable efforts to issue in exchange for the December 2018 Notes a new series of notes under our existing Indenture, dated as of November 21, 2017, as amended and supplemented from time to time, on substantially the same terms as the Company's outstanding publicly-traded 7.25% Senior Notes due 2028, which have substantially the same terms as the December 2018 Notes, effect the registration with the Securities and Exchange Commission of the resale and listing of the December 2018 Notes on the NYSE American, and assist in marketing the December 2018 Notes for resale. The Company has received such written request from the note holders regarding the exchange and resale registration rights.
Bank Loan - Securities America
On February 6, 2019, Securities America Financial Corporation entered into an amendment to its loan agreement with a third-party financial institution to provide for a term loan in the aggregate principal amount of $7,000, with interest accruing at the rate of 5.52%. Securities America began monthly payments of principal and interest under the term loan in the amount of $212 on March 6, 2019. The term loan matures on February 6, 2022. The loan is collateralized by Securities America's assets. The loan agreement contains certain affirmative and negative covenants, including covenants regarding Securities America's client asset levels and number of financial advisors. Total interest expense related to the term loan was $210 for the nine months ended September 30, 2019. At September 30, 2019, $5,728 was outstanding under the term loan.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
10. Commitments and Contingencies
Litigation and Regulatory Matters
In December 2014 and January 2015, two purported class action suits were filed in the U.S. District Court for the Southern District of New York against American Realty Capital Partners, Inc. (“ARCP”), certain affiliated entities and individuals, ARCP’s auditing firm, and the underwriters of ARCP’s May 2014 $1,656,000 common stock offering (“May 2014 Offering”) and three prior note offerings. The complaints have been consolidated. Ladenburg was named as a defendant as one of 17 underwriters of the May 2014 Offering and as one of eight underwriters of ARCP’s July 2013 offering of $300,000 in convertible notes. The complaint alleges, among other things, that the offering materials were misleading based on financial reporting of expenses, improperly-calculated AFFO (adjusted funds from operations), and false and misleading Sarbanes-Oxley certifications, including statements as to ARCP’s internal controls, and that the underwriters are liable for violations of federal securities laws. The plaintiffs seek an unspecified amount of compensatory damages, as well as other relief. In June 2016, the court denied the underwriters’ motions to dismiss the complaint. In August 2017, the court granted the plaintiffs’ motion for class certification. In September 2019 the parties entered into a stipulation of settlement that provides for resolution of the matter with no contribution from Ladenburg or the other underwriter defendants. In October 2019, the court entered an order granting preliminary approval to the settlement. A final hearing seeking court approval of the settlement agreement is scheduled for January 2020. In the event that the lawsuit proceeds, Ladenburg intends to vigorously defend against these claims.
In November 2015, two purported class action complaints were filed in state court in Tennessee against Miller Energy Resources, Inc. (“Miller”), officers, directors, auditors and nine firms that underwrote six securities offerings in 2013 and 2014, which offerings 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. The plaintiffs’ motions for class certification and to remand the case to state court are pending. Ladenburg intends to vigorously defend against these claims.
SEC examination 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 (including the requirement to seek best execution) 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 SEC 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 completed restitution to its affected clients in 2016.
On April 6, 2018, the SEC issued an order against Securities America Advisors on consent that includes a cease and desist order and imposes remedial sanctions of disgorgement, prejudgment interest, and a fine; the combined total amount is $5,828, which had previously been reserved. Securities America Advisors has completed its distribution of the funds pursuant to the terms of the order.
In February 2018, the SEC announced a Share Class Selection Disclosure Initiative (“Initiative”) to encourage registered investment advisory firms to self-report failures to disclose conflicts of interest to clients concerning the selection of mutual fund share classes that paid fees pursuant to Rule 12b-1 of the Investment Company Act of 1940 for the period 2014-2016. Under the Initiative, the SEC requires self-reporting firms, among other things, to disgorge to clients the 12b-1 fees received during the relevant period when lower-cost share classes were available. Three of the Company's investment advisory subsidiaries determined to self-report under the Initiative. On March 11, 2019, the SEC issued orders on consent against SSN Advisory, Inc. and Investacorp Advisory Services, Inc. that include cease and desist orders and impose remedial sanctions of disgorgement and prejudgment interest; the combined total amount is $2,149, which had previously been reserved. The matter was closed as to the third investment advisory subsidiary without formal action. SSN Advisory, Inc. and Investacorp Advisory Services, Inc. are paying out the funds pursuant to the terms of the orders.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
Two arbitration claims were filed against Securities America in June and September 2018, and one complaint was filed in the United States District Court for the Southern District of New York in February 2019, by a total of 14 customers asserting that a former registered representative of Securities America defrauded them through, among other things, the use of improper wire transfers and false account documents. The customers asserted, among other claims, claims for fraud, negligence, §10(b) violations, failure to supervise, respondeat superior, breach of fiduciary and other duties. In November and December 2018, settlements were reached resolving the two arbitration claims; the amounts paid in connection with those two claims were not material. Securities America has moved to compel arbitration of the complaint, which asserts a total of $18,000 in compensatory damages.
In August and September 2019, four purported class action complaints were filed in Florida courts, three in state court and one in federal court, against Greenlane Holdings, Inc. (“Greenlane”), as well as its officers, directors, and five underwriters of Greenlane’s initial public offering in April 2019, which raised approximately $110,000. Ladenburg was one of the five underwriters. The complaints allege, among other things, that the offering materials were misleading based on the failures to disclose risks that Greenlane, a large distributor of JUUL electronic cigarette products, faces from initiatives in several large cities to limit or ban the manufacture and/or sale of electronic cigarette products. The complaints also allege 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. The three state court cases have been consolidated and an amended complaint is expected to be filed by December 2019. Ladenburg intends to vigorously defend against these claims.
From July to October 2019, six customers filed arbitration claims against Triad, asserting, among other things, that Triad was negligent in permitting Triad's registered representatives to solicit investments in private placements offered by GPB Capital Holdings, because of purported excessive risk and unsuitability. The customers assert, among other claims, claims for negligence, breach of contract, failure to supervise, and breach of fiduciary duty. Total compensatory damages sought for investments in GPB Capital Holdings that occurred at Triad are approximately $1,650. Also, a purported class action lawsuit was filed in United States District Court for the Western District of Texas in October 2019 against GPB Capital Holdings, and a number of other defendants including its founder, distributing broker-dealer, auditor, fund administrator and 76 broker-dealers that offered its funds, including Triad. The lawsuit alleges, among other things, fraud, breach of fiduciary duty, negligence, and violations of the Texas Securities Act in connection with sales of private placements offered by GPB Capital Holdings. Damages are unspecified. Triad has not yet been served with the lawsuit. Triad intends to vigorously defend against all of these matters.
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.
The Company had accrued liabilities in the amount of approximately $3,718 at September 30, 2019 and $9,869 at December 31, 2018 for certain pending matters which are included in accounts payable and accrued liabilities. Amounts accrued are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, advice of counsel, available defenses, potential recoveries from other parties, experience in similar cases of proceedings, as well as assessment of matters, including settlements, involving other defendants in similar or related cases of proceedings. During the three and nine months ended September 30, 2019, the Company charged $444 and $1,812, 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.
11. 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.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
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 two clearing brokers. At September 30, 2019, the amount due from these clearing brokers was $27,835, which represents a substantial concentration of credit risk should these clearing brokers be unable to fulfill their obligations.
In the normal course of business, Securities America, Triad, Investacorp, KMS, SSN and Ladenburg may enter into transactions in financial instruments with off-balance sheet risk. As of September 30, 2019, 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 market values of the related securities, and such entities will incur a loss if, at the time of purchase, the market 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.
12. Shareholders’ Equity
Repurchase Program
In March 2007, October 2011, November 2014, November 2016 and April 2019, the Company’s board of directors authorized, in the aggregate, the repurchase of up to 37,500,000 shares of the Company’s common stock from time to time on the open market or in privately negotiated transactions, depending on market conditions.
Since inception through September 30, 2019, 27,226,063 shares of common stock have been repurchased for $73,194 under the program and have been retired, including the repurchase of 155,571 for $526 and 2,041,958 shares for $7,078 during the three and nine months ended September 30, 2019. As of September 30, 2019, 10,273,937 shares remained available for purchase under the program.
Stock Compensation Plans
As of September 30, 2019, there was $56 of unrecognized compensation cost for stock-based compensation related to options. This cost is expected to be recognized over the remaining vesting periods of the options, which on a weighted-average basis is approximately 0.29 year for all grants.
Options were exercised to purchase 444,481 and 3,193,408 shares of the Company’s common stock during the three and nine months ended September 30, 2019, respectively, for which the intrinsic value on dates of exercise was $583 and $6,917, respectively.
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
Restricted stock granted during the nine months ended September 30, 2019 was as follows:
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Final Vesting Date
|
Shares
|
Fair Value (1)
|
January 10, 2019 (2)
|
|
January 10, 2023
|
2,295,000
|
|
$
|
7,436
|
|
January 25, 2019 (3)
|
|
January 25, 2021
|
30,000
|
|
86
|
|
April 22, 2019 (2)
|
|
April 22, 2023
|
250,000
|
|
945
|
|
June 13, 2019 (3)
|
|
June 13, 2021
|
210,000
|
|
737
|
|
|
|
|
2,785,000
|
|
$
|
9,204
|
|
|
|
(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 two equal annual installments beginning on the first anniversary of the grant date.
|
During the three and nine months ended September 30, 2019, 0 and 82,500 shares of restricted stock were forfeited, respectively.
As of September 30, 2019, there was $12,363 of unrecognized compensation cost for stock-based compensation related to restricted stock grants, of which $7,431 related to the 2019 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 2.68 years for all grants and approximately 3.16 years for the 2019 grants.
Stock-based compensation, including options and restricted stock, attributed to employees was $1,536 and $4,459 for the three and nine months ended September 30, 2019, respectively.
Stock-based compensation for consultants and independent financial advisors was $0 and $15 for the three and nine months ended September 30, 2019, respectively. In the three and nine months ended September 30, 2019, $0 and 1,002,460 shares were surrendered to cover payment of taxes.
Capital Stock
During the three months ended September 30, 2019, the Company sold no shares of Series A Preferred Stock under the Company's "at the market" offering program and incurred costs of $18 in connection with such program. For the nine months ended September 30, 2019, the Company sold 389,207 shares of Series A Preferred Stock under its "at the market" offering program, which provided to the Company net proceeds of $9,431.
For the three and nine months ended September 30, 2019, the Company paid dividends of $8,702 and $25,987, on its outstanding Series A Preferred Stock based on a monthly dividend of approximately $0.1667 per share.
For the three and nine months ended September 30, 2019, the Company paid a quarterly dividend of $0.0125 per share on its outstanding common stock. For the three and nine months ended September 30, 2019, the Company paid dividends of $1,793 and $5,380 on its outstanding common stock.
13. Per Share Data
Basic net income (loss) per common share is computed by dividing net income (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:
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited; Amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30, 2019
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Basic weighted-average shares
|
143,092,912
|
|
|
196,381,910
|
|
|
143,281,873
|
|
|
196,281,283
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Options to purchase common stock
|
4,310,499
|
|
|
10,616,368
|
|
|
—
|
|
|
—
|
|
Restricted shares of common stock
|
556,598
|
|
|
1,388,958
|
|
|
—
|
|
|
—
|
|
Dilutive potential common shares
|
4,867,097
|
|
|
12,005,326
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding and dilutive potential common shares
|
147,960,009
|
|
|
208,387,236
|
|
|
143,281,873
|
|
|
196,281,283
|
|
Basic weighted-average shares do not include 5,336,500 and 4,215,270 unvested restricted shares of common stock for the three and nine months ended September 30, 2019 and 2018, respectively.
For the three months ended September 30, 2019, options to purchase 7,894,000 shares of common stock and 2,921,250 unvested restricted shares of common stock and for the nine months ended September 30, 2019, options to purchase 17,424,872 shares of common stock and 5,336,500 unvested restricted shares of common stock were not included in the computation of diluted income (loss) per share as the effect would have been anti-dilutive.
For the three months ended September 30, 2018, options to purchase 4,289,000 shares of common stock and 437,000 unvested restricted shares of common stock and for the nine months ended September 30, 2018 options to purchase 26,371,583 shares of common stock and 4,215,270 unvested restricted shares of common stock were not included in the computation of diluted income (loss) per share as the effect would have been anti-dilutive.
14. 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.
15. 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, 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 an affiliate of Highland, 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, amortization of contract acquisition costs, change in fair value of contingent consideration related to acquisitions, non-cash compensation expense, financial advisor recruiting expense and other expense, which includes 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 acquisition-related expense, amortization of retention and forgivable loans, amortization of contract acquisition costs 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, 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Independent
Advisory and Brokerage Services
|
|
Ladenburg
|
|
Insurance Brokerage
|
|
Corporate
|
|
Total
|
Revenues
|
|
$
|
305,204
|
|
|
$
|
23,519
|
|
|
$
|
44,914
|
|
|
$
|
895
|
|
|
$
|
374,532
|
|
Income (loss) before income taxes
|
|
20,238
|
|
|
5,191
|
|
|
1,719
|
|
|
(11,851
|
)
|
(1)
|
15,297
|
|
EBITDA, as adjusted (3)
|
|
28,466
|
|
|
5,210
|
|
|
2,343
|
|
|
(4,933
|
)
|
|
31,086
|
|
Identifiable assets (2)
|
|
539,991
|
|
|
58,679
|
|
|
101,780
|
|
|
117,674
|
|
|
818,124
|
|
Depreciation and amortization
|
|
4,653
|
|
|
120
|
|
|
468
|
|
|
5
|
|
|
5,246
|
|
Interest
|
|
133
|
|
|
1
|
|
|
58
|
|
|
6,026
|
|
|
6,218
|
|
Capital expenditures
|
|
2,892
|
|
|
—
|
|
|
2
|
|
|
(3
|
)
|
|
2,891
|
|
Non-cash compensation
|
|
251
|
|
|
178
|
|
|
—
|
|
|
1,107
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
300,015
|
|
|
$
|
15,180
|
|
|
$
|
32,960
|
|
|
$
|
720
|
|
|
$
|
348,875
|
|
Income (loss) before income taxes
|
|
18,538
|
|
|
821
|
|
|
(145
|
)
|
|
(6,557
|
)
|
(1)
|
12,657
|
|
EBITDA, as adjusted (3)
|
|
27,224
|
|
|
1,110
|
|
|
239
|
|
|
(3,264
|
)
|
|
25,309
|
|
Identifiable assets (2)
|
|
509,270
|
|
|
49,841
|
|
|
90,920
|
|
|
150,560
|
|
|
800,591
|
|
Depreciation and amortization
|
|
5,457
|
|
|
122
|
|
|
261
|
|
|
5
|
|
|
5,845
|
|
Interest
|
|
311
|
|
|
2
|
|
|
76
|
|
|
2,817
|
|
|
3,206
|
|
Capital expenditures
|
|
3,780
|
|
|
95
|
|
|
31
|
|
|
(8
|
)
|
|
3,898
|
|
Non-cash compensation
|
|
317
|
|
|
176
|
|
|
—
|
|
|
887
|
|
|
1,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Independent
Advisory and Brokerage Services
|
|
Ladenburg
|
|
Insurance Brokerage
|
|
Corporate
|
|
Total
|
Revenues
|
|
$
|
890,024
|
|
|
$
|
56,763
|
|
|
$
|
124,689
|
|
|
$
|
2,091
|
|
|
$
|
1,073,567
|
|
Income (loss) before income taxes
|
|
52,334
|
|
|
8,524
|
|
|
2,254
|
|
|
(33,474
|
)
|
(1)
|
29,638
|
|
EBITDA, as adjusted (3)
|
|
78,040
|
|
|
9,217
|
|
|
4,160
|
|
|
(13,246
|
)
|
|
78,171
|
|
Identifiable assets (2)
|
|
539,991
|
|
|
58,679
|
|
|
101,780
|
|
|
117,674
|
|
|
818,124
|
|
Depreciation and amortization
|
|
15,270
|
|
|
359
|
|
|
1,412
|
|
|
16
|
|
|
17,057
|
|
Interest
|
|
365
|
|
|
(10
|
)
|
|
177
|
|
|
16,308
|
|
|
16,840
|
|
Capital expenditures
|
|
9,100
|
|
|
—
|
|
|
35
|
|
|
(91
|
)
|
|
9,044
|
|
Non-cash compensation
|
|
765
|
|
|
536
|
|
|
—
|
|
|
3,173
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
875,015
|
|
|
$
|
55,614
|
|
|
$
|
101,945
|
|
|
$
|
3,441
|
|
|
$
|
1,036,015
|
|
Income (loss) before income taxes
|
|
45,926
|
|
|
7,113
|
|
|
556
|
|
|
(19,418
|
)
|
(1)
|
34,177
|
|
EBITDA, as adjusted (3)
|
|
72,456
|
|
|
8,029
|
|
|
2,093
|
|
|
(11,266
|
)
|
|
71,312
|
|
Identifiable assets (2)
|
|
509,270
|
|
|
49,841
|
|
|
90,920
|
|
|
150,560
|
|
|
800,591
|
|
Depreciation and amortization
|
|
16,332
|
|
|
345
|
|
|
726
|
|
|
13
|
|
|
17,416
|
|
Interest
|
|
861
|
|
|
50
|
|
|
415
|
|
|
5,900
|
|
|
7,226
|
|
Capital expenditures
|
|
10,035
|
|
|
351
|
|
|
101
|
|
|
16
|
|
|
10,503
|
|
Non-cash compensation
|
|
936
|
|
|
529
|
|
|
113
|
|
|
2,864
|
|
|
4,442
|
|
|
|
(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 before income taxes for the three and nine months ended September 30, 2019 and 2018 to EBITDA, as adjusted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Income before income taxes
|
|
$
|
15,297
|
|
|
$
|
12,657
|
|
|
$
|
29,638
|
|
|
$
|
34,177
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
(882
|
)
|
|
(810
|
)
|
|
(2,138
|
)
|
|
(1,688
|
)
|
|
Change in fair value of contingent consideration
|
|
93
|
|
|
54
|
|
|
290
|
|
|
165
|
|
|
Interest expense
|
|
6,218
|
|
|
3,206
|
|
|
16,840
|
|
|
7,226
|
|
|
Depreciation and amortization
|
|
5,246
|
|
|
5,845
|
|
|
17,057
|
|
|
17,416
|
|
|
Non-cash compensation expense
|
|
1,536
|
|
|
1,380
|
|
|
4,474
|
|
|
4,442
|
|
|
Amortization of retention and forgivable loans
|
|
139
|
|
|
97
|
|
|
391
|
|
|
280
|
|
|
Amortization of contract acquisition costs
|
|
2,988
|
|
|
2,488
|
|
|
8,639
|
|
|
7,059
|
|
|
Financial advisor recruiting expense
|
|
9
|
|
|
115
|
|
|
18
|
|
|
291
|
|
|
Acquisition-related expense
|
|
—
|
|
|
—
|
|
|
24
|
|
|
913
|
|
|
Income attributable to noncontrolling interest
|
|
79
|
|
|
(13
|
)
|
|
58
|
|
|
(22
|
)
|
|
Other (1) (2)
|
|
363
|
|
|
290
|
|
|
2,880
|
|
|
1,053
|
|
|
EBITDA, as adjusted
|
|
$
|
31,086
|
|
|
$
|
25,309
|
|
|
$
|
78,171
|
|
|
$
|
71,312
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as adjusted
|
|
|
|
|
|
|
|
|
|
Independent Advisory and Brokerage Services
|
|
$
|
28,466
|
|
|
$
|
27,224
|
|
|
$
|
78,040
|
|
|
$
|
72,456
|
|
|
Ladenburg
|
|
5,210
|
|
|
1,110
|
|
|
9,217
|
|
|
8,029
|
|
|
Insurance Brokerage
|
|
2,343
|
|
|
239
|
|
|
4,160
|
|
|
2,093
|
|
|
Corporate
|
|
(4,933
|
)
|
|
(3,264
|
)
|
|
(13,246
|
)
|
|
(11,266
|
)
|
|
Total segments
|
|
$
|
31,086
|
|
|
$
|
25,309
|
|
|
$
|
78,171
|
|
|
$
|
71,312
|
|
|
|
|
(1)
|
Includes severance costs of $160 and $1,269, excise and franchise tax expense of $134 and $416, compensation expense that may be paid in stock of $399 and $1,256, non-recurring expenses related to a block repurchase of our common stock and other legal matters of $(55) and $214 and reversal of a write-off for a sublease commitment of $(275) for the three and nine months ended September 30, 2019.
|
|
|
(2)
|
Includes severance costs of $0 and $174, excise and franchise tax expense of $164 and $486 and compensation expense that may be paid in stock of $126 and $393 for the three and nine months ended September 30, 2018.
|