| Revenue from Contracts with Customers | Revenue from Contracts with Customers The Company adopted ASC 606, effective January 1, 2018, using the modified retrospective method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of shareholders' equity and other affected accounts at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under the accounting standards in effect for prior periods. Performance Obligations Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring promised goods or services to customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for those promised goods or services. The following provides detailed information on the recognition of the Company's revenue from contracts with customers: Broker Dealer Commissions The Company’s broker-dealer subsidiaries earn commissions by executing client transactions in stocks, mutual funds, variable annuities and other financial products and services. Commissions revenue is recognized on trade date when the performance obligation is satisfied. Commissions revenue is paid on settlement date, which is generally two business days after trade date for equities securities and corporate bond transactions and one business day for government securities and commodities transactions. The Company records a receivable on the trade date and receives a payment on settlement date. I nsurance Commissions The Company’s performance obligation with respect to each contract is the sale of the insurance policy. Insurance commissions revenue includes an initial up-front (first year) commission as well as annual trailing commission payments for each policy renewal. Commissions on insurance renewal premiums are considered variable consideration. ASC 606 requires that, at the time of the initial sale of a policy, the Company must estimate the variable consideration (future renewal commissions) and determine the transaction price as the unconstrained net present value of expected future renewal commissions. Therefore, the transaction price includes the first year fixed commission and the variable consideration for the trailing commissions, estimated using the expected value method and a portfolio approach. Previously, the Company recognized trailing commissions as cash was received. The Company also estimates a reduction of the transaction price for possible future chargebacks. The Company controls the insurance services provided to the carriers and acts as a principal in providing insurance services to its customers. Accordingly, the Company records the first year and trailing commissions revenue on a gross basis when each policy is bound as an enforceable contract. Previously, the Company recorded revenue on a gross or net basis depending on how cash was received. Advisory Fees Advisory fee revenue represents fees charged by registered investment advisors (“RIAs”) to their clients based upon the value of client assets under management (“AUM”). The Company records fees charged to clients as advisory fees where the Company considers itself to be the primary RIA. The Company determined that the primary RIA firm is the principal in providing advisory services to clients and will therefore recognize the corresponding advisory fee revenues on a gross basis when the advisory services are conducted using the Company's corporate RIA platform. As a result, the portion of the advisory fees paid to the client's independent financial advisor are classified as commissions and fees expense in the condensed consolidated statements of operations. Certain independent financial advisors conduct their advisory business through their own RIA firm, rather than using one of the Company's corporate RIA subsidiaries. These independent entities, or Hybrid RIAs, engage the Company for clearing, regulatory and custody services, as well as for access to investment advisory platforms. The advisory fee revenue generated by these Hybrid RIAs is earned by the independent financial advisors, and is not included in the Company's advisory fee revenues. However, the Company charges separate fees to Hybrid RIAs for technology, custody and administrative services based on the AUM within the client’s accounts. These fees are recognized on a net basis and classified as advisory fees in the condensed consolidated statements of operations. Historically, we have generally recognized advisory fee revenue on a gross basis based on the fees charged by the independent financial advisors to their clients. Accordingly, our reported advisory revenue and the independent financial advisors’ compensation in our independent advisory and brokerage services segment is materially lower in 2018 as compared to the prior year periods and reported advisory revenue growth may lag behind the overall growth rate of advisory assets. Investment Banking Investment banking revenues consist of underwriting revenue, strategic advisory revenue and private placement fees. Underwriting The performance obligation is the consummation of the sale of securities for each contract with a customer. The transaction price includes fixed management fees and is recognized as revenue when the performance obligation is satisfied, generally the trade date. Where Ladenburg is the lead underwriter, revenue and expenses will be first allocated to other members of a syndicate because Ladenburg is acting as an agent for the syndicate. Accordingly, the Company records revenue on a net basis. When Ladenburg is not the lead underwriter, Ladenburg will recognize its share of revenue and expenses on a gross basis, because Ladenburg is acting as the principal. Under accounting standards in effect for prior periods, the Company recognized all underwriting revenue on a net basis. Strategic Advisory Services Performance obligations in these arrangements vary dependent on the contract, but are typically satisfied upon completion of the arrangement. Transaction fees may include retainer, management, and/or success fees, which are recognized upon completion of a deal. Under the accounting standards in effect for prior periods, retainer fees were deferred and amortized over the estimated duration of the engagement. Ladenburg controls the service as it is transferred to the customer, and is therefore acting as a principal. Accordingly, the Company records revenues and out-of-pocket reimbursements on a gross basis, consistent with practice under the accounting standards in effect for those periods, except for out-of-pocket reimbursements previously presented on a net basis. Private Placement The performance obligation is the consummation of the sale of securities for each contract with a customer. The transaction price includes fixed management fees and is recognized as revenue when the performance obligation is satisfied, generally the trade date. Ladenburg controls the service as it is transferred to the customer, and is therefore acting as a principal. Accordingly, the Company records revenues and out-of-pocket reimbursements on a gross basis, consistent with practice under the accounting standards in effect for those periods, except for out-of-pocket reimbursements previously presented on a net basis. Service Fees Service fees principally includes amounts charged to independent financial advisors for processing of securities trades and for providing administrative and compliance services. Also, the Company's subsidiaries earn fees from their cash sweep programs, in which clients' cash deposits in their brokerage accounts are swept into interest-bearing deposit accounts at various third-party banks. Disaggregation of Revenue In the following table, revenue is disaggregated by service line and segment: For the Three Months Ended June 30, 2018 Independent Advisory and Brokerage Services Ladenburg Insurance Brokerage Corporate Total Commissions $ 140,360 $ 2,936 $ 37,085 $ — $ 180,381 Advisory fees 120,690 1,892 — 56 122,638 Investment banking 313 12,085 — (669 ) 11,729 Principal transactions (4 ) 229 — 8 233 Interest and dividends 620 160 — 300 1,080 Service fees 26,772 619 — 194 27,585 Other income 10,720 199 840 2,351 14,110 Total revenues $ 299,471 $ 18,120 $ 37,925 $ 2,240 $ 357,756 For the Six Months Ended June 30, 2018 Independent Advisory and Brokerage Services Ladenburg Insurance Brokerage Corporate Total Commissions $ 270,105 $ 6,149 $ 67,413 $ — $ 343,667 Advisory fees 233,203 3,708 — 110 237,021 Investment banking 429 28,459 — (669 ) 28,219 Principal transactions 7 385 — 8 400 Interest and dividends 1,154 235 — 478 1,867 Service fees 50,912 1,187 — 388 52,487 Other income 19,190 311 1,572 2,406 23,479 Total revenues $ 575,000 $ 40,434 $ 68,985 $ 2,721 $ 687,140 Contract Balances For each of its insurance policies, the Company receives an initial up-front (first year) commission as well as annual trailing commission payments for each policy renewal. The Company will incur commission expenses related to the trailing commission payments for each policy renewal as well. The timing of revenue recognition, cash collections, and commission expense on the insurance policies results in contract assets and contract liabilities. The following table provides information about contract assets and contract liabilities from contracts with customers. Estimated trailing commissions are included in other receivables, net while estimated expenses on trailing commissions are included in commissions and fees payable on the condensed consolidated statement of financial condition: As of June 30, 2018 As of January 1, 2018 (Adoption Date) Contract assets - Insurance trailing commissions $ 61,025 $ 58,786 Contract liabilities - Insurance trailing commissions 30,358 29,395 Performance obligations related to insurance brokerage revenue are considered satisfied when the sale of the initial insurance policies are completed, including expected future trailing commissions due to the Company each year upon customer renewals of the policies sold. Upon receipt of the annual trailing commission, the Company pays a corresponding commission expense. Based on historical data, customer renewal periods are estimated at approximately eight years from the sale of the initial policy. Accordingly, all contract asset and liabilities associated with trailing insurance commissions are considered long-term, except for the renewals expected in the next twelve-month period which approximate $22,000 in contract assets and $11,000 in contract liabilities. Increases to the contract asset were a result of $7,579 and $13,985 in estimated trailing commissions from new policies during the three and six months ended June 30, 2018, respectively, while decreases were driven by $8,902 and $11,916 in actual commissions received during the three and six months ended June 30, 2018, respectively. Increases to the contract liability were a result of $3,796 and $7,005 in estimated commission expense from new policies during the three and six months ended June 30, 2018, respectively, while decreases were driven by $6,009 and $6,042 in actual commissions paid during the three and six months ended June 30, 2018, respectively. Costs to Obtain a Contract with a Customer The Company capitalizes the incremental costs of obtaining a contract with a customer (independent financial advisor) if the costs (1) relate directly to an existing contract or anticipated contract, (2) generate or enhance resources that will be used to satisfy performance obligations in the future, and (3) are expected to be recovered. These costs are included in contract acquisition costs, net in the condensed consolidated statements of financial condition and will be amortized over the estimated customer relationship period. The Company uses an amortization method that is consistent with the pattern of transfer of goods or services to its customers. Any costs that are not incremental costs of obtaining a contract with a customer, such as costs of onboarding, training and support of independent financial advisors, would not qualify for capitalization. The Company pays fees to third-party recruiters and bonuses to employees for recruiting independent financial advisors to affiliate with the Company's independent advisory and brokerage subsidiaries, and thereby bring their client’s accounts to the Company, which generates ongoing advisory fee revenue, commissions revenue, and monthly service fee revenue to the Company. An additional cost to obtain an independent financial advisor may include forgivable loans. Forgivable loans take many forms, but they are differentiated by the fact that at inception the loan is intended to be forgiven over time by the Company. The loans are given as an inducement to attract independent financial advisors to become affiliated with the Company's independent advisory and brokerage subsidiaries. Each of the Company’s independent advisory and brokerage subsidiaries may offer new independent financial advisors a forgivable loan as part of his/her affiliation offer letter. These amounts are paid upfront and are capitalized, then amortized over the expected useful lives of the independent financial advisor’s relationship period with the independent advisory and brokerage firm. The balance of contract acquisition costs, net, was $76,972 as of June 30, 2018, an increase of $15,632 compared to the adoption date of January 1, 2018. Amortization on these contract acquisition costs was $4,571 during the six months ended June 30, 2018. There were no impairments or changes to underlying assumptions related to contract acquisition costs, net, for the period. Transaction Price Allocated to Remaining Performance Obligation Contract liabilities represent accrued commission expense associated with the accrued insurance trailing commission contract assets. The Company does not have any contract liabilities representing revenues that will be recognized in future periods upon the satisfaction of any remaining performance obligations. Practical Expedients The following practical expedients available under the modified retrospective method were applied upon adoption of ASC 606: 1. We applied the practical expedient outlined under ASC 606-10-65-1(h), and did not restate contracts that were completed contracts as of the date of initial application, i.e. January 1, 2018. 2. We applied the practical expedient outlined under ASC 606-10-65-1(f)(4) and did not separately evaluate the effects of contract modifications. Instead, we reflect the aggregate effect of all the modifications that occurred before the initial application date, i.e. January 1, 2018. 3. We applied the practical expedient outlined under ASC 606-10-10-4 that allows for the accounting for incremental costs of obtaining contracts at a portfolio level in order to determine the amortization period. 4. We applied the practical expedient outlined under ASC 340-40-25-4 and did not capitalize the incremental costs to obtain a contract if the amortization period for the asset is one year or less. Impacts on Financial Statements on January 1, 2018 The following table summarizes the impacts of ASC 606 adoption on the Company’s condensed consolidated statement of financial condition as of January 1, 2018. The Company adjusted notes receivable from financial advisors, net by reclassifying all of its forgivable loans to contract acquisition costs, net in the condensed consolidated statements of financial position. Previously, forgivable loans were amortized based on their legal terms, typically forgiven over periods ranging from 3 to 7 years as long as the associated independent financial advisor remained in compliance with the terms of the forgivable loan. Under ASC 606, the acquisition costs, net are amortized over the expected useful lives of the independent financial advisors’ relationship period with the Company. The Company adjusted intangible assets, net by eliminating a portion of net intangible asset that was created through the Company’s acquisition of Highland in 2014. ASC 606 requires that, at the time of the initial sale of a policy, the Company must estimate the variable consideration (future renewal commissions) and determine the transaction price as the unconstrained net present value of expected future renewal commissions. As such, the Company accelerated the revenues recognized under its insurance policies and recorded an increase to other receivables, net that was offset by the partial elimination of the net intangible asset and an increase to commissions and fees payable. Condensed Consolidated Statement of Financial Condition As Reported Adjustments Adjusted December 31, 2017 Investment Banking Insurance Renewals Costs to obtain or fulfill a contract January 1, 2018 ASSETS (Audited) Cash and cash equivalents $ 172,103 — — — $ 172,103 Securities owned, at fair value 3,881 — — — 3,881 Receivables from clearing brokers 48,543 — — — 48,543 Receivables from other broker-dealers 2,822 — — — 2,822 Notes receivable from financial advisors, net 47,369 — — $ (40,566 ) 6,803 Other receivables, net 60,707 $ (137 ) $ 58,786 — 119,356 Fixed assets, net 23,621 — — — 23,621 Restricted assets 760 — — — 760 Intangible assets, net 103,611 — (23,645 ) — 79,966 Goodwill 124,210 — — — 124,210 Contract acquisition costs, net — — — 61,340 61,340 Cash surrender value of life insurance 12,711 — — — 12,711 Other assets 31,687 25 — — 31,712 Total assets $ 632,025 $ (112 ) $ 35,141 $ 20,774 $ 687,828 LIABILITIES AND SHAREHOLDERS' EQUITY Securities sold, but not yet purchased, at fair value $ 231 — — — $ 231 Accrued compensation 33,343 (110 ) — — 33,233 Commissions and fees payable 67,221 — 29,395 — 96,616 Accounts payable and accrued liabilities 40,478 (104 ) — (1,133 ) 39,241 Deferred rent 2,151 — — — 2,151 Deferred income taxes 2,968 28 1,489 2,118 6,603 Deferred compensation liability 18,161 — — — 18,161 Accrued interest 232 — — — 232 Notes payable 96,849 — — — 96,849 Total liabilities $ 261,634 $ (186 ) $ 30,884 $ 985 $ 293,317 Commitments and contingencies Shareholders' equity: Preferred stock 2 — — — 2 Common stock 20 — — — 20 Additional paid-in capital 520,135 — — — 520,135 Accumulated deficit (149,778 ) 74 4,257 19,778 (125,669 ) Total shareholders' equity of the Company 370,379 74 4,257 19,778 394,488 Noncontrolling interest 12 — — 11 23 Total shareholders' equity 370,391 74 4,257 19,789 394,511 Total liabilities and shareholders' equity $ 632,025 $ (112 ) $ 35,141 $ 20,774 $ 687,828 Impacts on Financial Statements at June 30, 2018 The following tables compare the reported condensed consolidated statement of financial condition and statements of operations as of and for the three and six months ending June 30, 2018, to the pro-forma amounts had the previous accounting standards been in effect. During the three and six months ended June 30, 2018, the Company's net income as reported is greater than the net income amounts without the adoption of ASC 606 due to the following: 1) the timing of revenue recognized for commissions on future renewals of insurance policies sold is accelerated, as these future commissions represent variable consideration and are required to be estimated, 2) certain costs to obtain a contract with a customer are now capitalized and have historically been recorded as a period expense, and 3) forgivable loans to independent financial advisors are now amortized over the expected useful lives of their relationship period with the Company's subsidiaries; previously these loans were amortized based on their legal terms. Condensed Consolidated Statement of Financial Condition As of June 30, 2018 As Reported Balances without the adoption of ASC 606 Effects of Change Higher/(Lower) ASSETS Cash and cash equivalents $ 204,847 $ 204,847 $ — Securities owned, at fair value 6,548 6,548 — Receivables from clearing brokers 45,013 45,013 — Receivables from other broker-dealers 2,520 2,520 — Notes receivable from financial advisors, net 5,893 58,579 (52,686 ) Other receivables, net 129,182 68,414 60,768 Fixed assets, net 26,307 26,307 — Restricted assets 6,589 6,589 — Intangible assets, net 72,296 93,314 (21,018 ) Goodwill 124,210 124,210 — Contract acquisition costs, net 76,972 — 76,972 Cash surrender value of life insurance 12,907 12,907 — Other assets 34,606 34,150 456 Total assets $ 747,890 $ 683,398 $ 64,492 LIABILITIES AND SHAREHOLDERS' EQUITY Securities sold, but not yet purchased, at market value $ 4,920 $ 4,920 $ — Accrued compensation 27,418 27,446 (28 ) Commissions and fees payable 105,194 74,836 30,358 Accounts payable and accrued liabilities 54,169 53,996 173 Deferred rent 2,772 2,772 — Deferred income taxes 6,558 2,363 4,195 Deferred compensation liability 19,999 19,999 — Accrued interest 191 191 — Notes payable 136,171 136,171 — Total liabilities $ 357,392 $ 322,694 $ 34,698 Commitments and contingencies Shareholders' equity: Preferred stock 2 2 — Common stock 20 20 — Additional paid-in capital 501,348 501,348 — Accumulated deficit (110,904 ) (140,687 ) 29,783 Total shareholders' equity of the Company 390,466 360,683 29,783 Noncontrolling interest 32 21 11 Total shareholders' equity 390,498 360,704 29,794 Total liabilities and shareholders' equity $ 747,890 $ 683,398 $ 64,492 Condensed Consolidated Statement of Operations Three Months Ended June 30, 2018 As Reported Amounts without the adoption of ASC 606 Effects of Change Higher/(Lower) Revenues: Commissions $ 180,381 $ 157,576 $ 22,805 Advisory fees 122,638 173,888 (51,250 ) Investment banking 11,729 10,479 1,250 Principal transactions 233 290 (57 ) Interest and dividends 1,080 1,080 — Service fees 27,585 27,585 — Other income 14,110 14,110 — Total revenues 357,756 385,008 (27,252 ) Expenses: Commissions and fees 254,405 283,915 (29,510 ) Compensation and benefits 48,573 48,901 (328 ) Non-cash compensation 1,568 1,568 — Brokerage, communication and clearance fees 2,941 2,818 123 Rent and occupancy, net of sublease revenue 2,387 2,387 — Professional services 5,311 4,659 652 Interest 2,154 2,141 13 Depreciation and amortization 5,762 7,076 (1,314 ) Acquisition-related expenses — — — Amortization of retention and forgivable loans 107 3,444 (3,337 ) Amortization of contract acquisition costs 2,361 — 2,361 Other 18,253 18,246 7 Total expenses 343,822 375,155 (31,333 ) Income before item shown below 13,934 9,853 4,081 Change in fair value of contingent consideration (50 ) (50 ) — Income before income taxes 13,884 9,803 4,081 Income tax expense 4,574 4,439 135 Net income 9,310 5,364 3,946 Net income attributable to noncontrolling interest 8 8 — Net income attributable to the Company $ 9,302 $ 5,356 $ 3,946 Dividends declared on preferred stock (8,508 ) (8,508 ) — Net income (loss) available to common shareholders $ 794 $ (3,152 ) $ 3,946 Net income (loss) per common share available to common shareholders (basic) $ 0.00 $ (0.02 ) $ 0.02 Net income (loss) per common share available to common shareholders (diluted) $ 0.00 $ (0.02 ) $ 0.02 Weighted average common shares used in computation of per share data: Basic 196,557,837 196,557,837 — Diluted 209,855,936 196,557,837 13,298.099 Condensed Consolidated Statement of Operations Six Months Ended June 30, 2018 As Reported Amounts without the adoption of ASC 606 Effects of Change Higher/(Lower) Revenues: Commissions $ 343,667 $ 303,614 $ 40,053 Advisory fees 237,021 337,815 (100,794 ) Investment banking 28,219 25,625 2,594 Principal transactions 400 483 (83 ) Interest and dividends 1,867 1,860 7 Service fees 52,487 52,487 — Other income 23,479 23,573 (94 ) Total revenues 687,140 745,457 (58,317 ) Expenses: Commissions and fees 485,716 547,736 (62,020 ) Compensation and benefits 95,822 96,387 (565 ) Non-cash compensation 3,062 3,062 — Brokerage, communication and clearance fees 8,260 7,889 371 Rent and occupancy, net of sublease revenue 4,880 4,880 — Professional services 10,329 9,296 1,033 Interest 4,020 4,007 13 Depreciation and amortization 11,571 14,198 (2,627 ) Acquisition-related expenses 913 913 — Amortization of retention and forgivable loans 183 6,600 (6,417 ) Amortization of contract acquisition costs 4,571 — 4,571 Other 36,182 36,316 (134 ) Total expenses 665,509 731,284 (65,775 ) Income before item shown below 21,631 14,173 7,458 Change in fair value of contingent consideration (111 ) (111 ) — Income before income taxes 21,520 14,062 7,458 Income tax expense 6,746 4,960 1,786 Net income 14,774 9,102 5,672 Net income attributable to noncontrolling interest 9 9 — Net income attributable to the Company $ 14,765 $ 9,093 $ 5,672 Dividends declared on preferred stock (17,016 ) (17,016 ) — Net loss available to common shareholders $ (2,251 ) $ (7,923 ) $ 5,672 Net loss per common share available to common shareholders (basic) $ (0.01 ) $ (0.04 ) $ 0.03 Net loss per common share available to common shareholders (diluted) $ (0.01 ) $ (0.04 ) $ 0.03 Weighted average common shares used in computation of per share data: Basic 196,230,136 196,230,136 — Diluted 196,230,136 196,230,136 — |
