10-Q 1 ladenburgthalmann2018q110-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2018

OR

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

For the transition period from _____ to ______

Commission File Number 001-15799

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes__X__ No___

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




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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ___ No  X 
    
As of May 3, 2018 there were 200,443,228 shares of the registrant's common stock outstanding.




   

LADENBURG THALMANN FINANCIAL SERVICES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

TABLE OF CONTENTS

 
 
Page
PART I. FINANCIAL INFORMATION
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART  II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
 






PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except share and per share amounts)
 
March 31, 2018 
 (Unaudited)
 
December 31, 2017
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
145,417

 
$
172,103

Securities owned, at fair value
4,104

 
3,881

Receivables from clearing brokers
55,842

 
48,543

Receivables from other broker-dealers
2,263

 
2,822

Notes receivable from financial advisors, net
6,522

 
47,369

Other receivables, net
122,154

 
60,707

Fixed assets, net
23,886

 
23,621

Restricted cash
760

 
760

Intangible assets, net
76,131

 
103,611

Goodwill
124,210

 
124,210

Contract acquisition costs, net
73,234

 

Cash surrender value of life insurance
12,691

 
12,711

Other assets
36,941

 
31,687

      Total assets
$
684,155

 
$
632,025



 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
Securities sold, but not yet purchased, at fair value
$
235

 
$
231

Accrued compensation
18,828

 
33,343

Commissions and fees payable
95,937

 
67,221

Accounts payable and accrued liabilities
52,205

 
40,478

Deferred rent
2,571

 
2,151

Deferred income taxes
6,532

 
2,968

Deferred compensation liability
18,340

 
18,161

Accrued interest
261

 
232

Notes payable, net of unamortized discount of $357 and $424 in 2018 and 2017, respectively and net of debt issuance costs of $3,418 and $3,412 in 2018 and 2017, respectively.
98,997

 
96,849

      Total liabilities
293,906

 
261,634

 
 
 
 
Commitments and contingencies (Note 9)


 


SHAREHOLDERS' EQUITY:
 
 
 
Preferred stock, $.0001 par value; authorized 50,000,000 shares: 8% Series A cumulative redeemable preferred stock; designated 23,844,916 shares in 2018 and 2017; shares issued and outstanding 17,012,075 in 2018 and 2017 (liquidation preference $425,302 in 2018 and 2017)
2

 
2

Common stock, $.0001 par value; authorized 1,000,000,000 shares in 2018 and 2017; shares issued and outstanding, 200,517,787 in 2018 and 198,583,941 in 2017
20

 
20

   Additional paid-in capital
510,409

 
520,135

   Accumulated deficit
(120,206
)
 
(149,778
)
 
 
 
 
      Total shareholders’ equity of the Company
390,225

 
370,379

 
 
 
 
Noncontrolling interest
24

 
12

 
 
 
 
      Total shareholders' equity
390,249

 
370,391

 
 
 
 
      Total liabilities and shareholders' equity
$
684,155

 
$
632,025

See accompanying notes.

1




LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Commissions
 
$
163,286

 
$
130,050

Advisory fees
 
114,383

 
127,003

Investment banking
 
16,490

 
6,489

Principal transactions
 
167

 
320

Interest and dividends
 
787

 
635

Service fees
 
24,902

 
18,556

Other income
 
9,369

 
7,238

Total revenues
 
329,384

 
290,291

Expenses:
 
 
 
 
Commissions and fees
 
231,311

 
218,734

Compensation and benefits
 
47,249

 
39,125

Non-cash compensation
 
1,494

 
1,429

Brokerage, communication and clearance fees
 
5,319

 
4,565

Rent and occupancy, net of sublease revenue
 
2,493

 
2,392

Professional services
 
5,018

 
4,123

Interest
 
1,866

 
477

Depreciation and amortization
 
5,809

 
7,432

Acquisition-related expenses
 
913

 
176

Amortization of retention and forgivable loans
 
76

 
1,591

Amortization of contract acquisition costs
 
2,210

 

Other
 
17,929

 
14,917

Total expenses
 
321,687

 
294,961

Income (loss) before item shown below
 
7,697

 
(4,670
)
Change in fair value of contingent consideration
 
(61
)
 
152

Income (loss) before income taxes
 
7,636

 
(4,518
)
Income tax expense (benefit)
 
2,172

 
(839
)
Net income (loss)
 
5,464

 
(3,679
)
Net income (loss) attributable to noncontrolling interest
 
1

 
(5
)
Net income (loss) attributable to the Company
 
$
5,463

 
$
(3,674
)
Dividends declared on preferred stock
 
(8,508
)
 
(7,924
)
Net loss available to common shareholders
 
$
(3,045
)
 
$
(11,598
)
 
 
 
 
 
Net loss per common share available to common shareholders (basic)
 
$
(0.02
)
 
$
(0.06
)
 
 
 
 
 
Net loss per common share available to common shareholders (diluted)
 
$
(0.02
)
 
$
(0.06
)
 
 
 
 
 
Weighted average common shares used in computation of per share data:
 
 
 
 
Basic
 
195,898,794

 
192,270,615

Diluted
 
195,898,794

 
192,270,615

See accompanying notes.

2



LADENBURG THALMANN FINANCIAL SERVICES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Amounts in thousands, except share amounts)
(Unaudited)


 
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Noncontrolling Interest
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2017
 
17,012,075

 
$
2

 
198,583,941

 
$
20

 
$
520,135

 
$
(149,778
)
 
$
12

 
$
370,391

Cumulative effect of adoption of ASC 606 (See Note 2)
 

 

 

 

 

 
24,109

 
11

 
24,120

Balance - January 1, 2018
 
17,012,075

 
2

 
198,583,941

 
20

 
520,135

 
(125,669
)
 
23

 
394,511

Issuance of common stock under employee stock purchase plan
 

 

 
59,944

 

 
186

 

 

 
186

Exercise of stock options (net of 131,070 shares tendered in payment of exercise price)
 

 

 
553,599

 

 
828

 

 

 
828

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

 

 

 

 
7

 

 

 
7

Stock-based compensation to employees
 

 

 

 

 
1,487

 

 

 
1,487

Issuance of restricted stock
 

 

 
1,855,000

 

 

 

 

 

Repurchase and retirement of common stock, including 239,481 shares surrendered for tax withholdings and 9,816 shares tendered in payment of exercise price
 

 

 
(534,697
)
 

 
(1,729
)
 

 

 
(1,729
)
Preferred stock issued, net of underwriting discount and expense of $37
 

 

 

 

 
(37
)
 

 

 
(37
)
Preferred stock dividends declared and paid
 

 

 

 

 
(8,508
)
 

 

 
(8,508
)
Common stock dividends declared and paid
 

 

 

 

 
(1,960
)
 

 

 
(1,960
)
Net income
 

 

 

 

 

 
5,463

 
1

 
5,464

Balance - March 31, 2018
 
17,012,075

 
$
2

 
200,517,787

 
$
20

 
$
510,409

 
$
(120,206
)
 
$
24

 
$
390,249



See accompanying notes.

3

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

 
Three Months Ended 
 March 31,
 
2018
 
2017
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income (loss)
$
5,464

 
$
(3,679
)
      Adjustments to reconcile net income (loss) to
 
 
 
          net cash used in operating activities:
 
 
 
Change in fair value of contingent consideration
61

 
(152
)
Adjustment to deferred rent
420

 
178

Amortization of intangible assets
3,835

 
5,486

Amortization of debt discount
112

 
113

Amortization of debt issue cost
99

 

Amortization of retention and forgivable loans
76

 
1,591

Amortization of contract acquisition costs
2,210

 

Depreciation and other amortization
1,974

 
1,946

Deferred income taxes
(71
)
 
(945
)
Non-cash interest expense on forgivable loan
40

 
116

Non-cash compensation expense
1,494

 
1,429

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

 
1

 
 
 
 
(Increase) decrease in operating assets
 
 
 
Securities owned, at fair value
(223
)
 
224

Receivables from clearing brokers
(7,299
)
 
(2,708
)
Receivables from other broker-dealers
559

 
(1,354
)
Other receivables, net
(2,798
)
 
(433
)
Contract acquisition costs, net
(14,104
)
 

Notes receivable from financial advisors, net
205

 
(2,466
)
Cash surrender value of life insurance
20

 
(408
)
Other assets
(5,229
)
 
(818
)
 
 
 
 
Increase (decrease) in operating liabilities
 
 
 
Securities sold, but not yet purchased, at fair value
4

 
(49
)
Accrued compensation
(14,405
)
 
(12,178
)
Accrued interest
(11
)
 
(55
)
Commissions and fees payable
(679
)
 
2,839

Deferred compensation liability
179

 
61

Accounts payable and accrued liabilities
12,903

 
438

      Net cash used in operating activities   
(15,164
)
 
(10,823
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of fixed assets
(2,239
)
 
(2,393
)
      Net cash used in investing activities   
(2,239
)
 
(2,393
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of Series A preferred stock
(37
)
 
(28
)
Issuance of common stock
1,014

 
452

Issuance of senior notes
4,385

 

Series A preferred stock dividends paid
(8,508
)
 
(7,924
)
Common stock dividends paid
(1,960
)
 

Repurchase and retirement of common stock
(1,729
)
 
(604
)
Bank loan and revolver repayments
(669
)
 
(219
)
Principal payments on notes payable
(1,779
)
 
(1,748
)
      Net cash used in financing activities   
(9,283
)
 
(10,071
)
Net decrease in cash and cash equivalents
(26,686
)
 
(23,287
)
      Cash and cash equivalents including restricted cash, beginning of period
172,863

 
99,941

      Cash and equivalents at end of period:
 
 
 
      Cash and cash equivalents
145,417

 
75,643

      Restricted cash
760

 
1,011

      Cash and cash equivalents including restricted cash, end of period   
$
146,177

 
$
76,654

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
1,626

 
$
303

Taxes paid
27

 
89



See accompanying notes.

4



LADENBURG THALMANN FINANCIAL SERVICES INC.
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 (‘‘Securities America’’), Triad Advisors (‘‘Triad’’), Investacorp (‘‘Investacorp’’), KMS Financial Services (“KMS”), Securities Service Network (“SSN”), Ladenburg Thalmann & Co. (‘‘Ladenburg’’), Ladenburg Thalmann Asset Management (‘‘LTAM’’), Premier Trust (‘‘Premier Trust’’), Highland Capital Brokerage (“Highland”) and Ladenburg Thalmann Annuity Insurance Services (‘‘LTAIS’’).

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


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


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

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

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

Securities America's, Triad's, Investacorp's, KMS's, SSN's and Ladenburg's customer transactions are cleared through clearing brokers on a fully-disclosed basis and such entities are subject to regulation by, among others, the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board. Each entity is a member of the Securities Investor Protection Corporation. Highland and LTAIS are subject to regulation by various regulatory bodies, including state attorneys general and insurance departments. Premier Trust is subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division.

Basis of Presentation

The condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Because of the nature of the Company’s business, interim period results may not be indicative of full year or future results.

The unaudited condensed consolidated financial statements do not include all information and notes required in annual audited financial statements in conformity with GAAP. The statement of financial condition at December 31, 2017 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, 2017 for additional disclosures and a description of accounting policies.
 

5

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



Certain amounts in the prior period financial statements were reclassified to conform with the current period financial statement presentation.

New Accounting Standards Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which completes the joint effort by the FASB and the International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and the International Financial Reporting Standards. The new guidance outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. ASU 2014-09 also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations.

On January 1, 2018, the Company adopted ASU 2014-09 and all related amendments ("ASC 606") 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. The comparative information for prior periods has not been adjusted and continues to be reported under the accounting standards in effect for those periods. See Note 2 for further information.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. On January 1, 2018, the Company adopted ASU 2016-01. The adoption of ASU 2016-01 effective January 1, 2018 did not have any impact on the Company's consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230). ASU 2016-18 provides guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2017 using a retrospective adoption method. The adoption of ASU 2016-18, effective January 1, 2018, did not have any impact on the Company's consolidated financial statements.

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

Accounting Standards Issued But Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company's current lease arrangements expire through 2032 and the Company is currently assessing the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.



6

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



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.

2. Revenue from Contracts with Customers

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

Performance Obligations

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

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

Broker Dealer Commissions

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

Insurance Commissions

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

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



7

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



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.



8

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



Service Fees

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

Disaggregation of Revenue

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

 
$
3,213

 
$
30,328

 
$

 
$
163,286

Advisory fees
 
112,513

 
1,816

 

 
54

 
114,383

Investment banking
 
116

 
16,374

 

 

 
16,490

Principal transactions
 
11

 
156

 

 

 
167

Interest and dividends
 
534

 
75

 

 
178

 
787

Service fees
 
24,140

 
568

 

 
194

 
24,902

Other income
 
8,470

 
112

 
732

 
55

 
9,369

Total revenues
 
$
275,529

 
$
22,314

 
$
31,060

 
$
481

 
$
329,384


Contract Balances

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

 
$
58,786

Contract liabilities - Insurance trailing commissions
 
32,571

 
29,395


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


9

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

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

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

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

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

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

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

Impacts on Financial Statements on January 1, 2018

The following table summarizes the impacts of ASC 606 adoption on the Company’s condensed consolidated


10

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



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.











11

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



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



12

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




Impacts on Financial Statements at March 31, 2018

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



13

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



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

 
$
145,417

 
$

Securities owned, at fair value
 
4,104

 
4,104

 

Receivables from clearing brokers
 
55,842

 
55,842

 

Receivables from other broker-dealers
 
2,263

 
2,263

 

Notes receivable from financial advisors, net
 
6,522

 
57,038

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

 
60,231

 
61,923

Fixed assets, net
 
23,886

 
23,886

 

Restricted assets
 
760

 
760

 

Intangible assets, net
 
76,131

 
98,463

 
(22,332
)
Goodwill
 
124,210

 
124,210

 

Contract acquisition costs, net
 
73,234

 

 
73,234

Cash surrender value of life insurance
 
12,691

 
12,691

 

Other assets
 
36,941

 
36,586

 
355

 
 
 
 
 
 
 
Total assets
 
$
684,155

 
$
621,491

 
$
62,664

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

 
$
235

 
$

Accrued compensation
 
18,828

 
18,816

 
12

Commissions and fees payable
 
95,937

 
63,366

 
32,571

Accounts payable and accrued liabilities
 
52,205

 
51,874

 
331

Deferred rent
 
2,571

 
2,571

 

Deferred income taxes
 
6,532

 
2,631

 
3,901

Deferred compensation liability
 
18,340

 
18,340

 

Accrued interest
 
261

 
261

 

Notes payable
 
98,997

 
98,997

 

Total liabilities
 
$
293,906

 
$
257,091

 
$
36,815

 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
Sharedholders' equity:
 
 
 
 
 
 
Preferred stock
 
2

 
2

 

Common stock
 
20

 
20

 

Additional paid-in capital
 
510,409

 
510,409

 

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

 
 
 
 
 
 
 
  Total shareholders equity of the Company
 
390,225

 
364,387

 
25,838

 
 
 
 
 
 
 
Noncontrolling interest
 
24

 
13

 
11

 
 
 
 
 
 
 
Total shareholders' equity
 
390,249

 
364,400

 
25,849

 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
684,155

 
$
621,491

 
$
62,664






14

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



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

 
$
146,038

 
$
17,248

Advisory fees
 
114,383

 
163,927

 
(49,544
)
Investment banking
 
16,490

 
15,146

 
1,344

Principal transactions
 
167

 
193

 
(26
)
Interest and dividends
 
787

 
781

 
6

Service fees
 
24,902

 
24,902

 

Other income
 
9,369

 
9,463

 
(94
)
Total revenues
 
329,384

 
360,450

 
(31,066
)
Expenses:
 

 

 
 
Commissions and fees
 
231,311

 
263,822

 
(32,511
)
Compensation and benefits
 
47,249

 
47,486

 
(237
)
Non-cash compensation
 
1,494

 
1,494

 

Brokerage, communication and clearance fees
 
5,319

 
5,071

 
248

Rent and occupancy, net of sublease revenue
 
2,493

 
2,493

 

Professional services
 
5,018

 
4,636

 
382

Interest
 
1,866

 
1,866

 

Depreciation and amortization
 
5,809

 
7,123

 
(1,314
)
Acquisition-related expenses
 
913

 
913

 

Amortization of retention and forgivable loans
 
76

 
3,156

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

 

 
2,210

Other
 
17,929

 
18,071

 
(142
)
Total expenses
 
321,687

 
356,131

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

 
4,319

 
3,378

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

Income before income taxes
 
7,636

 
4,258

 
3,378

Income tax expense
 
2,172

 
521

 
1,651

Net income
 
5,464

 
3,737

 
1,727

Net income attributable to noncontrolling interest
 
1

 
1

 

Net income attributable to the Company
 
$
5,463

 
$
3,736

 
$
1,727

Dividends declared on preferred stock
 
(8,508
)

(8,508
)
 

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

$
(4,772
)
 
$
1,727

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

$
(0.02
)
 
$

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

$
(0.02
)
 
$

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


195,898,794

 

Diluted
 
195,898,794


195,898,794

 



15

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




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.
The following tables present the carrying values and estimated fair values at March 31, 2018 and December 31, 2017 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.
 
 
 
March 31, 2018
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$
145,417

 
$
145,417

 
$

 
$
145,417

Receivables from clearing brokers
 
55,842

 

 
55,842

 
55,842

Receivables from other broker-dealers
 
2,263

 

 
2,263

 
2,263

Notes receivables, net (1)
 
6,522

 

 
6,522

 
6,522

Other receivables, net
 
122,154

 

 
122,154

 
122,154

 
 
$
332,198

 
$
145,417

 
$
186,781

 
$
332,198

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Accrued compensation
 
$
18,828

 
$

 
$
18,828

 
$
18,828

Commissions and fees payable
 
95,937

 

 
95,937

 
95,937

Accounts payable and accrued liabilities (2)
 
50,449

 

 
50,449

 
50,449

Accrued interest
 
261

 

 
261

 
261

Notes payable, net (3)
 
98,997

 

 
100,732

 
100,732

 
 
$
264,472

 
$

 
$
266,207

 
$
266,207


(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 $1,756.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.


16

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






 
 
December 31, 2017
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
Total Estimated Fair Value
Cash and cash equivalents
 
$
172,103

 
$
172,103

 
$

 
$
172,103

Receivables from clearing brokers
 
48,543

 

 
48,543

 
48,543

Receivables from other broker-dealers
 
2,822

 

 
2,822

 
2,822

Notes receivables, net (1)
 
47,369

 

 
47,369

 
47,369

Other receivables, net
 
60,707

 

 
60,707

 
60,707

 
 
$
330,953

 
$
172,103

 
$
158,850

 
$
330,953

 
 

 

 

 

Liabilities
 

 

 

 

Accrued compensation
 
$
33,343

 
$

 
$
33,343

 
$
33,343

Commissions and fees payable
 
67,221

 

 
67,221

 
67,221

Accounts payable and accrued liabilities (2)
 
38,374

 

 
38,374

 
38,374

Accrued interest
 
232

 

 
232

 
232

Notes payable, net (3)
 
96,849

 

 
99,129

 
99,129

 
 
$
236,019

 
$

 
$
238,299

 
$
238,299


(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 $2,104.
(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 March 31, 2018 and December 31, 2017:

 
 
March 31, 2018
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
 Level 3
 
Total Estimated Fair Value
Certificates of deposit
 
$
463

 
$
463

 
$

 
$

 
$
463

Debt securities
 
1,935

 

 
1,935

 

 
1,935

Common stock and warrants
 
1,706

 
830

 
876

 

 
1,706

Total
 
$
4,104

 
$
1,293

 
$
2,811

 
$

 
$
4,104

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
 
$
1,756

 
$

 
$

 
$
1,756

 
$
1,756

Debt securities
 
200

 

 
200

 

 
200

Common stock and warrants
 
35

 
35

 

 

 
35

Total
 
$
1,991

 
$
35

 
$
200

 
$
1,756

 
$
1,991





17

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



 
 
December 31, 2017
Assets
 
Carrying Value
 
 Level 1
 
 Level 2
 
 Level 3
 
Total Estimated Fair Value
Certificates of deposit
 
$
568

 
$
568

 
$

 
$

 
$
568

Debt securities
 
1,918

 

 
1,918

 

 
1,918

Common stock and warrants
 
1,395

 
765

 
630

 

 
1,395

Total
 
$
3,881

 
$
1,333

 
$
2,548

 
$

 
$
3,881

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
 
$
2,104

 
$

 
$

 
$
2,104

 
$
2,104

Debt securities
 
151

 

 
151

 

 
151

Common stock and warrants
 
80

 
80

 

 

 
80

Total
 
$
2,335

 
$
80

 
$
151

 
$
2,104

 
$
2,335



As of March 31, 2018 and December 31, 2017, approximately $3,239 and $3,265, 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 March 31, 2018 and December 31, 2017, the fair values of the warrants were $717 and $475, respectively, and are included in common stock and warrants (Level 2) above.

From time to time, Ladenburg receives common stock as compensation for investment banking services. These securities are restricted under applicable securities laws and may be freely traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements of Rule 144 of the Securities Act of 1933, as amended, including the requisite holding period. Restricted common stock is classified as Level 2 securities.

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

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

Payments
 
(5,021
)
Change in fair value of contingent consideration
 
(19
)
Fair value of contingent consideration as of December 31, 2017
 
$
2,104

Payments
 
(409
)
Change in fair value of contingent consideration
 
61

Fair value of contingent consideration as of March 31, 2018
 
$
1,756




18

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



4. Intangible Assets

At March 31, 2018 and December 31, 2017, intangible assets subject to amortization consisted of the following:

 
 
 
 
March 31, 2018
 
December 31, 2017
  
 
Weighted-Average Estimated Useful Life (years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Technology
 
7.9
 
$
25,563

 
$
19,837

 
$
25,563

 
$
19,020

Relationships with financial advisors
 
14.7
 
117,995

 
52,261

 
117,995

 
49,925

Covenants not-to-compete
 
3.9
 
6,421

 
5,858

 
6,421

 
5,732

Trade names
 
7.7
 
16,910

 
12,802

 
16,910

 
12,245

Renewal revenue (1)
 
7.9
 

 

 
41,381

 
17,737

Total
 
 
 
$
166,889

 
$
90,758

 
$
208,270

 
$
104,659


(1) Due to the adoption of ASC 606 on January 1, 2018, the Company eliminated the renewal revenue intangible asset, net that was created through the Company's acquisition of Highland in 2014. See Note 2 for further information.

Aggregate amortization expense for the three months ended March 31, 2018 and 2017 amounted to $3,835 and $5,486, respectively. The weighted-average amortization period for total amortizable intangibles at March 31, 2018 is 10.09 years. As of March 31, 2018, the remaining estimated amortization expense for each of the five succeeding years and thereafter is as follows:
 
 
Remainder of 2018
$
11,372

2019
11,732

2020
10,145

2021
5,432

2022
5,432

2023 - 2039
32,018