# EQUITY SERVICES, INC. X-17A-5 (2021-02-24) — Broker-dealer annual report - Company: EQUITY SERVICES, INC. - Form: X-17A-5 - Filed: 2021-02-24 - Period: 2020-12-31 - Accession: 0000033350-21-000001 - CIK: 33350 - File #: 8-14286 - Material weakness: No - Auditor: PricewaterhouseCoopers LLP - Auditor location: Boston, MA - Contact: Jessica Kriewald - Phone: 8022293214 - Signed by: Jessica Kriewald (Vice President, Financial Operations Principal) Original filing: https://www.sec.gov/Archives/edgar/data/33350/000003335021000001/fixed_public2020.pdf --- {0}------------------------------------------------ # Equity Services, Inc. (A wholly-owned subsidiary of NLV Financial Corporation) Financial Statements with Supplementary Information As of and for the Year Ended December 31, 2020 {1}------------------------------------------------ | OMB APPROVAL | | | | | |------------------------------|--|--|--|--| | OMB Number:
3235-0123 | | | | | | Expires:
October 31, 2023 | | | | | | Estimated average burden | | | | | | nours per response 12.00 | | | | | | SEC FILE NUMBER | |-----------------| | 8-14286 | | | REPORT FOR THE PERIOD BEGINNING 01/01/2020
AND ENDING 12/31/2020 | | | | |-------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|-------------------|--------------------------------| | | | MM/DD/YY | | MM/DD/YY | | | | A. REGISTRANT IDENTIFICATION | | | | NAME OF BROKER-DEALER: Equity Services, Inc. | | | OFFICIAL USE ONLY | | | ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) | | | FIRM I.D. NO. | | | One National Life Drive | | | | | | | | (No. and Street) | | | | | Montpelier | VT | | 05604 | | | (City) | (State) | | (Zip Code) | | Jessica Kriewald | NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT | | | (802) 229-3412 | | | | | | (Area Code - Telephone Number) | | | | B. ACCOUNTANT IDENTIFICATION | | | | | INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in this Report* | | | | | | PricewaterhouseCoopers, LLP | | | | | | | (Name - if individual, state last, first, middle name) | | | | | 101 Seaport Boulevard, Suite 500 Boston | | MA | 02210 | | (Address) | | (City) | (State) | (Zip Code) | | CHECK ONE: | | | | | | | Certified Public Accountant
Public Accountant
Accountant not resident in United States or any of its possessions. | | | | | | | FOR OFFICIAL USE ONLY | | | | | | | | | | | | | | | | | of lama for aromotion from the a noquinquant that the annual remaind by the success of | | | | {2}------------------------------------------------ | Jessica Kriewald | | swear (or affirm) that, to the best of | | | |-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------|--------------------------------------------------------|--|--| | my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of
Equity Services, Inc. | | | | | | of December 31 | 2020 | are true and correct. I further swear (or affirm) that | | | | neither the company nor any partner, principal officer or director has any proprietary interest in any account
classified solely as that of a customer, except as follows: | | | | | | | Signature
Vice President, Financial Operations Principal | |--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------| | | Title | | Notary Public | | | This report ** contains (check all applicable boxes):
(a) Facing Page.
(b) Statement of Financial Condition.
(c) Statement of Income (Loss) or, if there is other comprehensive income in the period(s) presented, a Statement
of Comprehensive Income (as defined in §210.1-02 of Regulation S-X).
(d) Statement of Changes in Financial Condition.
(e) Statement of Changes in Stockholders' Equity or Partners' or Sole Proprietors' Capital.
(f) Statement of Changes in Liabilities Subordinated to Claims of Creditors.
(g) Computation of Net Capital.
(h) Computation for Determination of Reserve Requirements Pursuant to Rule 15c3-3.
(i) Information Relating to the Possession or Control Requirements Under Rule 15c3-3.
Computation for Determination of the Reserve Requirements Under Exhibit A of Rule 15c3-3.
consolidation.
(1) An Oath or Affirmation. | (i) A Reconciliation, including appropriate explanation of the Computation of Net Capital Under Rule 15c3-1 and the
(k) A Reconciliation between the audited Statements of Financial Condition with respect to methods of | | (m) A copy of the SIPC Supplemental Report. | (n) A report describing any material inadequacies found to have existed since the date of the previous audit. | | ** For conditions of confidential treatment of certain portions of this filing, see section 240.17a-5(e)(3). | | {3}------------------------------------------------ | | Page(s) | |--------------------------------------------------------------------------------------------------------|---------| | Report of Independent Registered Public Accounting Firm | 1 | | Financial Statements | | | Statement of Financial Condition | 3 | | Statement of Comprehensive Income | 4 | | Statement of Changes in Stockholder's Equity | 5 | | Statement of Cash Flows | 6 | | Notes to Financial Statements | 7 - 17 | | Supplemental Schedules | | | Schedule I - Computation of Net Capital under Rule 15c3-1 of the Securities and Exchange
Commission | 18 | | Schedule II - Statement Regarding Rule 15c3-3 of the Securities and Exchange Commission | 19 | {4}------------------------------------------------ ![](_page_4_Picture_0.jpeg) # **Report of Independent Registered Public Accounting Firm** To the Board of Directors and Stockholder of Equity Services, Inc. # *Opinion on the Financial Statements* We have audited the accompanying statement of financial condition of Equity Services, Inc. (the "Company") as of December 31, 2020, and the related statements of comprehensive income, of changes in stockholder's equity and of cash flows for the year then ended, including the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. # *Basis for Opinion* These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. {5}------------------------------------------------ ![](_page_5_Picture_0.jpeg) # *Supplemental Information* The accompanying Computation of Net Capital Under Rule 15c3-1 of the Securities and Exchange Commission and Statement Regarding Rule 15c3-3 of the Securities and Exchange Commission as of December 31, 2020 (collectively, the "supplemental information") have been subjected to audit procedures performed in conjunction with the audit of the Company's financial statements. The supplemental information is the responsibility of the Company's management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with Rule 17a-5 under the Securities Exchange Act of 1934. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole. Boston, Massachusetts February 23, 2021 We have served as the Company's auditor since at least 1993. We have not been able to determine the specific year we began serving as auditor of the Company. {6}------------------------------------------------ # Equity Services, Inc. (A wholly-owned subsidiary of NLV Financial Corporation) Statement of Financial Condition As of December 31, 2020 | | 2020 | |--------------------------------------------------------------------------------------|------------------| | Assets | | | Cash and cash equivalents | \$
6,471,965 | | Investment advisor fees receivable | 3,422,526 | | Prepaid expenses and other assets | 741,626 | | Other receivables | 3,173,111 | | Due from affiliates | 22,606 | | Income taxes recoverable from affiliate | 1,923 | | Deferred tax asset | 88,142 | | Total assets | \$
13,921,899 | | Liabilities | | | Investment advisor fees payable | \$
2,739,252 | | Accounts payable and accrued expenses | 805,707 | | Due to parent and affiliates | 776,135 | | Commissions payable | 2,386,108 | | Unearned revenue | 199,467 | | Total liabilities | 6,906,669 | | Stockholder's Equity | | | Common stock, \$1 par value - 1,000,000 shares authorized; 197,008 shares issued and | | | outstanding | 197,008 | | Additional paid-in capital | 50,902,358 | | Accumulated deficit | (44,084,136) | | Accumulated other comprehensive income (loss) | — | | Total stockholder's equity | 7,015,230 | | Total liabilities and stockholder's equity | \$
13,921,899 | | | | {7}------------------------------------------------ # Equity Services, Inc. (A wholly-owned subsidiary of NLV Financial Corporation) Statement of Comprehensive Income For the Year Ended December 31, 2020 | | | 2020 | |------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|-------------------------------------------------------------------------------------------------------------------| | Revenues
Commissions
Investment advisor fees
Marketing support, revenue sharing and other revenue
Total revenues | | 38,211,046
19,199,917
5,407,396
62,818,359 | | | | | | Operating expenses
Commissions
Investment advisor fees
Intercompany charges
General and administrative expenses
Salaries and benefits
Clearing agent fees
Marketing support charges
Total operating expenses
Loss before income taxes | | 33,344,714
16,943,314
2,453,399
3,059,688
6,337,743
1,233,245
52,220
63,424,323
(605,964) | | Income tax benefit | | 112,470 | | Net loss | | (493,494) | | Other comprehensive income (loss)
Unrealized gains (losses) on available-for sale securities
Total other comprehensive income (loss) | | —
— | | Comprehensive loss | \$ | (493,494) | {8}------------------------------------------------ # Equity Services, Inc. (A wholly-owned Subsidiary of NLV Financial Corporation) Statement of Changes in Stockholder's Equity For the Year Ended December 31, 2020 | | Common
Stock | Additional Paid-
In Capital | Accumulated
Deficit | Accumulated
Other
Comprehensive
Income (Loss) | Total
Stockholder's
Equity | |--------------------------------------|-----------------|--------------------------------|------------------------|--------------------------------------------------------|----------------------------------| | January 1, 2020 | | | | | | | Stockholder's Equity | \$ 197,008 | \$
50,902,358 | \$ (43,590,642) | \$
— | \$
7,508,724 | | Net loss | — | — | (493,494) | — | (493,494) | | Other comprehensive
income (loss) | | | | — | — | | Total comprehensive | | | | | | | income (loss) | | | | | (493,494) | | Capital contributions | — | — | — | — | — | | December 31, 2020 | | | | | | | Stockholder's Equity | \$ 197,008 | \$
50,902,358 | \$ (44,084,136) | \$
— | \$
7,015,230 | {9}------------------------------------------------ # Equity Services, Inc. (A wholly-owned Subsidiary of NLV Financial Corporation) Statement of Cash Flows For the Year Ended December 31, 2020 | | 2020 | |-------------------------------------------------------------------------------------------|-----------------| | Cash flows from operating activities | | | Net loss | \$
(493,494) | | Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | Depreciation | 10,695 | | Deferred tax provision | (100,571) | | Changes in assets and liabilities: | | | Investment advisor fees receivable | 28,359 | | Prepaid expenses and other assets | 623,302 | | Other receivables | 380,549 | | Due to/from affiliates | (315,911) | | Income taxes recoverable from affiliate | 78,679 | | Investment advisor fees payable | (68,914) | | Accounts payable and accrued expenses | (678,126) | | Commissions payable | 240,773 | | | | | Unearned revenue | 64,169 | | Net cash used in operating activities | (230,490) | | Cash flows from Investing activities | | | Purchase of property and equipment | - | | Net cash used in investing activities | — | | Cash flows from financing activities | | | Capital contributions | — | | Net cash provided by financing activities | — | | | | | Cash and cash equivalents | | | Net decrease in cash and cash equivalents | (230,490) | | Beginning of year | 6,702,455 | | End of year | \$
6,471,965 | | | | | Supplemental disclosure of cash flow information:
Interest paid | \$
5,625 | | Net income taxes received | \$
90,578 | | | | {10}------------------------------------------------ # Note 1 – Organization and Operations Equity Services, Inc. ("ESI" or the "Company") is a registered broker-dealer and a wholly-owned subsidiary of NLV Financial Corporation ("NLVF"), which in turn is a wholly-owned subsidiary of National Life Holding Company ("NLHC"). NLHC and its subsidiaries, including the Company, are collectively known as the National Life Group. National Life Insurance Company ("NLIC") is a wholly-owned subsidiary of NLVF and an affiliate of ESI. ESI is a member of the Financial Industry Regulatory Authority ("FINRA") and the Securities Investor Protection Corporation ("SIPC"). The Company earns commissions from the sale of mutual funds, direct placement programs, unit investment trusts, indexed annuity contracts, and variable insurance and annuity contracts. The Company is also a registered investment advisor and provides investment advisory services under the name of ESI Financial Advisors ("EFA"), and its income and expenses are reported as part of the results of the Company. # Note 2 – Significant Accounting Policies #### Basis of Presentation The Company's financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America ("US GAAP"). Preparing financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect reported amounts and related disclosures. Actual results may differ from those estimates. #### Cash and Cash Equivalents Cash and cash equivalents are comprised of funds on deposit with various financial institutions. #### Prepaid Expenses and Other Assets Prepaid expenses consist primarily of annual registration renewal fees and software licenses paid in advance. Other assets consist primarily of the accrual for the month-end receivable from the Company's primary clearing house. #### Other Receivables Other receivables primarily include receivables for trail commissions, loan receivables made to certain registered representatives for their transition to the Company and accrued marketing support revenue from non-affiliated sponsors. Loans made to registered representatives for their transition to the Company are paid back by the representatives or amortized based on the representatives' individual sales and investment advisory production. #### Property and Equipment Property and equipment are reported at depreciated cost. Assets are depreciated over their useful life using the straight-line method of depreciation. The table below outlines the useful life for each asset class: | Asset Class | Years | |-------------------------------|-------| | Equipment | 5 | | Internally developed software | 5-10 | | Furniture | 7 | {11}------------------------------------------------ # Equity Services, Inc. (A wholly-owned Subsidiary of NLV Financial Corporation) Notes to Financial Statements As of and for the Year Ended December 31, 2020 # Note 2 – Significant Accounting Policies (continued) #### Accounts Payable and Accrued Expenses Payable balances related to expenses for obligations, or services rendered but not yet paid at the end of the reporting period, are primarily inclusive of: 1) software maintenance invoices; 2) accrued expenses related to the Company's annual conference which is held for top producing agents; 3) salary expenses; and 4) legal expenses. #### Unearned Revenue Unearned revenue primarily includes affiliation fees charged to ESI registered representatives. These affiliation fees were received in advance as of December 31, 2020 and are related to the subsequent fiscal year. #### Revenue Recognition Revenue related to commissions, investment advisor fees, marketing support, revenue sharing, and other revenue are primarily included within the scope of Revenue from Contracts with Customers ("ASC 606"). See Note 4 - Revenue from Contracts with Customers for further discussion of revenue recognition. All other revenue excluded from the scope of Revenue from Contracts with Customers is recognized as it is earned or realized. #### Commission Expense Commission expense represents a portion of the commission revenue (gross dealer concession) that is earned by branch office supervisors, general agents and registered representatives of record on each sale. #### Investment Advisory Fee Expense The investment advisory fee expense and respective payable balance represent the incurred expenses and accrued payable, respectively, paid or due to registered representatives on revenue earned from EFA sponsors. #### Credit Loss Allowance Assets including transition loan receivables and trade receivables are primarily within the scope of Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("Topic 326"). See Note 5 – Measurement of Credit Losses for further discussion on loss allowances. #### Intercompany Charges NLVF and its subsidiary, NLIC, provide the Company with occupancy, information technology, administrative services and access to its distribution network. The charges for these services and other shared services are determined by the NLVF and NLIC expense sharing agreements and the allocation methodologies employed are applied uniformly across National Life Group and all of its affiliates, including the Company. See Note 10 - Related Party Transactions for further discussion of intercompany charges. #### General and Administrative General and administrative expenses represent costs to the Company incurred as a result of managing the Company. These costs include legal expenses, software maintenance and licenses, registration fees, amortization expense on loan receivable balances, depreciation, printing, postage, travel, outside consulting, and other miscellaneous expenses. #### Salaries and Benefits Salaries and employee benefits include ongoing compensation, associated payroll taxes, benefits and annual incentive compensation paid to employees. {12}------------------------------------------------ # Note 2 – Significant Accounting Policies (continued) #### Clearing Agent Fees Clearing agent fees are primarily trade related clearing and execution fees, statement and confirmation mailing, maintenance fees, technology fees, associated postage and other fees the Company pays to National Financial Services, LLC. ("NFS"), the Company's clearing broker-dealer. #### Marketing Support Charges The Company provides seminars and training opportunities for its registered representatives, which are expensed as incurred. #### Income Taxes The Company participates in the consolidated federal income tax return of NLHC. In accordance with the Company's tax sharing agreement with NLHC, the amount of income tax as determined on a consolidated return basis is allocated to each company based on its share of the total liability computed as if each company was filing a separate return. If applicable, the Company settles its income tax liability with NLHC periodically or is reimbursed by NLHC for any tax attributes utilized by the consolidated group. Accordingly, management believes it is more likely than not that the Company will realize the benefit of deferred tax assets, if any. #### Fair Value The carrying amounts of the following financial assets and financial liabilities are approximate fair values: due to parent and affiliates, due from affiliates, accounts payable and accrued expenses. #### Credit Risk The Company maintains cash and cash equivalent accounts at financial institutions, which may be exposed to credit risk. The Company has not experienced any losses in these accounts to date due to credit risk. ### Subsequent Events The Company has evaluated events subsequent to December 31, 2020 and through the financial statement issuance date of February 23, 2021. #### Note 3 – Recent Accounting Pronouncements #### Adopted ### Credit Losses In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance requires financial assets not reported at fair value to be presented at the amount expected to be collected, rather than only reporting losses probable of occurring. As an entity that files financial statements with the SEC, the pronouncement is effective for fiscal years beginning after December 15, 2019. The Company adopted the new standard for the fiscal year beginning January 1, 2020. Upon adoption, the Company would have recognized an additional expense of \$17,728 to the opening balance of the Company's Accumulated Deficit. However, this expense, along with an additional \$2,886 of expense related to current year's estimated credit losses, was recognized as a component of General and administrative expenses for the year ended December 31, 2020. Refer to Note 5 – Measurement of Credit Losses for discussion on loss allowance application and financial statement impact. {13}------------------------------------------------ # Note 4 – Revenue from Contracts with Customers ### Significant Judgement Revenue from contracts with customers primarily includes commission revenue, investment advisor fees, marketing support, revenue sharing, and affiliation fees. The recognition and measurement of revenue is based on the assessment of contract terms by revenue stream. Significant judgement is required to determine whether performance obligations are satisfied at a point in time or over time and whether constraints on variable consideration should be applied due to uncertain future events. # Commissions # Point of Sale Commissions The Company earns commissions from sales of mutual funds, unit investment trusts, variable annuities, indexed annuities, variable universal life policies, alternative investments, and other general securities. Commissions are recorded on a trade date basis. The Company's performance obligation is satisfied on the trade date when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to the customer. The Company typically receives payment at or near settlement for Point of Sale Commissions received directly from sponsors and the Company receives payment in the following month for securities transactions settled through the clearing broker. Most refunds of Point of Sale Commissions have historically been limited to variable annuity purchases that are still in the free-look period. Significant instances of a reversal of previously recognized Point of Sale Commissions due to refunds are remote. The receivable balances for Point of Sale Commissions earned but not yet received as of December 31, 2020 and January 1, 2020 were \$206,769 and \$142,922 respectively. #### Service Fees Sponsors of certain products may charge servicing fee revenue ("12b-1" fees or "trailing commissions") based on the net asset value ("NAV") of the underlying customer holdings of mutual funds, unit investment trusts, variable annuities, indexed annuities and alternative investments. The product sponsor charges these fees in association with the cost of distribution and servicing of assets of the accounts that are being managed. Where the Company is the broker-dealer of record on the account, the Company may receive a portion, or all, of these Service Fees from the related sponsor. The Company accounts for these fees as a single performance obligation because the Company is providing a series of distinct services that are substantially the same and have the same pattern of transfer. There is inherent uncertainty in estimating the amount of Service Fees that ESI could earn on an account as the fees are dependent on the value of the accounts as well as the length of time the accounts remain open, both of which are highly susceptible to factors outside the Company's influence. Therefore, Service Fee revenue is deemed constrained until it is probable that a significant revenue reversal will not occur. As Service Fees are considered to have a single performance obligation, revenue is allocated to the period in which the services have been provided in an amount that depicts the consideration the Company expects to receive. The Company estimates the expected value of Service Fee revenue earned but not yet received based on the most recent information available, which includes, among others, frequency of payments and historical cash receipts. {14}------------------------------------------------ # Note 4 – Revenue from Contracts with Customers (continued) The Company typically receives payment on either a monthly or quarterly basis for Service Fees received directly from sponsors and the Company receives payment in the following month for Service Fees paid by the clearing broker. Historically, the obligation for refunds or returns on Service Fees have been limited in nature. The receivable balances for Service Fees earned but not yet received as of December 31, 2020 and January 1, 2020 were \$2,181,300 and \$2,285,524, respectively. # Investment Advisor Fees The Company receives Investment Advisor Fees from third-party asset managers for investment advisory and portfolio management services, as well as fees from individual customers for financial planning services provided by the Company's investment advisor representatives. These fees are based on a percentage of assets under management ("AUM") for applicable accounts and earned over time. The Company accounts for these fees as a single performance obligation because the Company is providing a series of distinct services that are substantially the same and have the same pattern of transfer. There is an inherent uncertainty in estimating the amount of Investment Advisor Fees revenue the Company could earn on these accounts as the fees are dependent on the value of the accounts as well as the length of time the accounts remain open, both of which are highly susceptible to factors outside the Company's influence. Therefore, Investment Advisor Fees revenue is deemed constrained until it is probable that a significant revenue reversal will not occur. As Investment Advisor Fees are considered to have a single performance obligation, revenue is allocated to the period in which the services have been provided in an amount that depicts the consideration the Company expects to receive. The Company estimates the expected value of Investment Advisor Fee revenue earned but not yet received based on the most recent information available, which includes, among others, frequency of payments and historical cash receipts. For Investment Advisor Fees paid to the Company in advance of the performance obligation, the Company defers recognition of the Investment Advisor Fees until the performance obligation is satisfied. For Investment Advisor Fees paid in advance, the Company is obligated to return these fees if an investment advisor terminates their relationship with the Company and subsequently converts applicable account(s) to their new investment advisor firm prior to the satisfaction of the performance obligation. However, as Investment Advisor Fees paid in advance are recorded as unearned revenue until satisfaction of the performance obligation is complete, returns of these fees have not historically had a significant impact on the Company's recognition of revenue. For Investment Advisor Fees that the Company receives in arrears, the Company typically receives payment on either a monthly or quarterly basis. Historically, the obligation for refunds or returns on Investment Advisor Fees paid in arrears have been limited in nature. The receivable balances for Investment Advisor Fees earned but not yet received as of December 31, 2020 and January 1, 2020 were \$3,022,582 and \$3,119,079, respectively. #### Marketing Support, Revenue Sharing and Other Revenue from Customers ### Fees from Sales The Company has marketing support, revenue sharing and other arrangements with certain affiliated entities (NLIC and Life Insurance Company of the Southwest ("LSW")) and sponsors in which the Company receives fees based on sales of certain indexed annuities, variable annuities and mutual funds. The Company's performance obligation is satisfied on the trade date when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to the customer. {15}------------------------------------------------ # Note 4 – Revenue from Contracts with Customers (continued) The Company typically receives payment of these fees on a quarterly basis. Historically, the obligation for refunds or returns on Fees from Sales have been limited in nature. The receivable balances for Marketing support and other revenue from sales earned but not yet received as of December 31, 2020 and January 1, 2020 were \$204,605 and \$201,700, respectively. # Fees from Services The Company has marketing support and other arrangements with certain sponsors and external parties in which the Company receives fees, earned over time, based on AUM or NAV, for applicable accounts. The Company accounts for these fees as a single performance obligation because the Company is providing a series of distinct services that are substantially the same and have the same pattern of transfer. There is an inherent uncertainty in estimating the amount of marketing support and other revenue the Company could earn on these accounts as the fees are dependent on the value of the accounts as well as the length of time the accounts remain open, both of which are highly susceptible to factors outside the Company's influence. Therefore, these Fees from Services are deemed constrained until it is probable that a significant revenue reversal will not occur. As Fees from Services are considered to have a single performance obligation, revenue is allocated to the period in which the services have been provided in an amount that depicts the consideration the Company expects to receive. The Company estimates the expected value of Fees from Services revenue earned but not yet received based on the most recent information available, which includes, among others, frequency of payments and historical cash receipts. The Company typically receives payment of these fees on a quarterly basis. Historically, the obligation for refunds or returns on Fees from Services have been limited in nature. The receivable balances for Marketing support and other revenue from services earned but not yet received as of December 31, 2020 and January 1, 2020 were \$628,572 and \$585,827, respectively. # Affiliation Fees The Company charges Affiliation Fees to registered representatives to cover back-office and administrative costs associated with their affiliation to the Company. The Company accounts for these fees as a single performance obligation because the services are interdependent and together, they enable registered representatives to sell to their respective customers. Affiliation Fee revenue is earned over time as registered representatives simultaneously receive and consume the benefits provided. Certain registered representatives choose to pay annual Affiliation Fees in advance of the applicable year and the Company records these payments within Unearned Revenue. For Affiliation Fees paid in advance, the Company is obligated to return these fees if a registered representative terminates their relationship with the Company prior to the satisfaction of the performance obligation. However, as Affiliation Fees paid in advance are recorded as unearned revenue until satisfaction of the performance obligation is complete, returns of these fees have not historically had a significant impact on the Company's recognition of revenue. For other registered representatives, Affiliation Fees are deducted from commission payments during the ordinary course of business. The Unearned Revenue balances as of December 31, 2020 and January 1, 2020 were \$199,467 and \$135,298, respectively. {16}------------------------------------------------ # Note 4 – Revenue from Contracts with Customers (continued) #### Disaggregated Revenue from Contracts with Customers The following table presents revenue by major source for the year ended December 31, 2020 | | 2020 | |-------------------------------------------------------------------------|------------------| | Commission Revenue | \$ | | Point of Sale Commissions | 24,477,819 | | Service Fees | 13,733,227 | | Total Commissions | 38,211,046 | | Investment Advisor Fees | 19,199,917 | | Marketing Support, Revenue Sharing & Other Revenue from Customers | | | Fees from Sales | 1,700,342 | | Fees from Services | 2,762,183 | | Affiliation Fees | 713,177 | | Total Marketing Support, Revenue Sharing & Other Revenue from Customers | 5,175,702 | | Total Revenue from Contracts with Customers | \$
62,586,665 | # Note 5 – Measurement of Credit Losses Assets subject to Topic 326 primarily include transition loan receivables and trade receivables. The measurement and recognition of credit losses is based upon risk characteristics, historical loss information and various qualitative factors. #### Transition Loan Receivables The Company issues loans to certain registered representatives for their transition to the Company. The loans are paid back by the representatives or amortized based on the representatives' sales and investment advisory production. Circumstances of the transition loan receivable that affect the estimated credit loss allowance include issuance of new loans, forgiveness of existing loans and non-payment. For the fiscal year ended December 31, 2020, the Company issued \$96,500 in new transition loans and recognized \$22,066 in bad debt expense as a result of certain balances the Company deemed uncollectible. The transition loan recievable balance as of December 31, 2020 is \$655,828. The measurement of the Company's expected credit losses for transition loan receivables is based on the Company's perceived risk of non-payment by the loan recipients and the Company's inability to collect outstanding principal as a result of non-payment. The Company utilizes historical default rates that it has experienced throughout the life of the program over the weighted average principal of all issued transition loans, as well as a reasonable and supportable prospective adjustment to calculate the current credit loss allowance for a reporting period. The Company recognized \$20,614 in credit losses as a component of General and administrative expenses for the year ended December 31, 2020. {17}------------------------------------------------ # Note 5 – Measurement of Credit Losses (continued) # Trade Receivables The Company recognizes receivable balances for service fees retailed to trailing commissions and investment advisor fees as discussed in Note 4 - Revenue from Contracts with Customers. The application of credit losses on these trade receivable balances has been determined based on the Company's expectation of zero nonpayment due to credit for these receivables due to the following factors considered: 1) the fees are generally based on a minor percentage of the customers' underlying NAV and AUM which are held separately by thirdparty custodians, 2) the fee receivable balances are commonly current in nature and have a pay frequency of either a monthly or quarterly, 3) the Company has experienced no historical instances of non-payment, and 4) exposure to credit risk relating to these balances is offset by the associated accrued service and investment advisor fee expense. As of December 31, 2020, none of the receivable balances referred to above are considered past due. The Company has not recorded an allowance for expected credit losses in relation to these balances for the fiscal year ended December 31, 2020. The Company also recognizes receivable balances for fees from sales and fees from services related to revenue sharing arrangements as discussed in Note 4 - Revenue from Contracts with Customers. The Company has a zero expectation of non-payment due to credit related to these balances based on: 1) the high credit worthiness of each counterparty, 2) the fee balances are current in nature and have a pay frequency of quarterly, and 3) the Company has experienced no historical instances of non-payment. As of December 31, 2020, none of the receivable balances referred to above are considered past due. The Company has not recorded an allowance for expected credit losses in relation to these balances for the fiscal year ended December 31, 2020. The Company clears a portion of its securities transactions through a clearing broker on a fully disclosed basis. As of a result of this clearing relationship, the Company recorded a receivable balance due from the clearing broker related to point of sale commissions, services fees and marketing support fees from sales and services. This receivable balance is settled with the clearing broker on a monthly basis. The Company has a zero expectation of non-payment due to credit related to this balance due to: 1) the high credit worthiness of clearing broker, 2) the short duration of the receivable balance outstanding as it is settled on a monthly basis, 3) the existence of a Proprietary Account of an Introducing Broker-Dealer ("PAIB") agreement between the Company and the clearing broker which requires the clearing broker to establish a special reserve account for PAIB assets, and 4) the Company has experienced no historical instances of non-payment. As of December 31, 2020, the receivable balance due from the clearing broker is not considered past due. The Company has not recorded an allowance for expected credit losses in relation to this balance for the fiscal year ended December 31, 2020. {18}------------------------------------------------ # Note 6 – General and Administrative Expenses For the year ended December 31, 2020, general and administrative expenses are comprised of the following: | | 2020 | |------------------------------------------------|--------------| | Software Maintenance | \$ 1,735,790 | | Recruiting, Training, Licensing & Registration | 313,837 | | Printing, Postage & Supplies | 197,940 | | Travel & Entertainment | 57,472 | | Loan Amortization, Loss Allowance & Bad Debt | 258,512 | | Legal Expenses | 172,057 | | Public Accounting Fees | 78,878 | | Insurance & Bank Fees | 56,910 | | Dues & Memberships | 84,384 | | Consulting | 53,390 | | Other | 50,518 | | | \$ 3,059,688 | # Note 7 – Net Capital and Reserve Information The Company, as a registered broker-dealer, is subject to the provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 (the "Act"), as amended, which requires minimum "net capital" of the greater of \$100,000 or 6 2/3% of "aggregate indebtedness" subject to a maximum allowable ratio of "aggregate indebtedness" to "net capital" (as the terms are defined) of 15.0 to 1.0. Refer to Supplemental Schedule I for the calculation of aggregate indebtedness and net capital. The terms of Rule 15c3-1 exclude certain assets from capital in the calculation of aggregate indebtedness, net capital and the ratio of aggregate indebtedness, which at December 31, 2020, are as follows: | | 2020 | |-----------------------------------------------------|-----------------| | Net capital | \$
4,275,836 | | Aggregate indebtedness | 6,906,669 | | Net capital requirement | 460,445 | | Excess net capital | \$
3,815,391 | | Percentage of aggregate indebtedness to net capital | 162% | The operations of the Company do not include the physical handling of securities or the maintenance of open customer accounts. Such activities are performed by the Company's clearing broker on a fully disclosed basis for brokerage business or by the product offeror for subscription way basis business. The operations of the Company do not include directly or indirectly receiving, holding, or otherwise owing funds or securities for or to customers; other than money or other consideration received and promptly transmitted in compliance with Rule 15c2-4(a) or (b)(2). Accordingly, the Company claims that the reserve provisions of Rule 15c3-3 of the Act do not apply under the exemption allowed by paragraph (k)(2)(ii) of such rule for brokerage business activities and under the exemption allowed by Footnote 74 of the SEC Release No. 34-70073 for subscription way business activities. As such the Company has not included the schedules "Computation for Determination of Reserve {19}------------------------------------------------ # Note 7 – Net Capital and Reserve Information (continued) Requirement under Rule 15c3-3" or "Information relating to Possession or Control Requirements under Rule 15c3-3." # Note 8 – Property and Equipment Property and equipment owned by the Company as of December 31, 2020: | | 2020 | |----------------------------|-----------------| | Property and equipment | \$
1,776,521 | | Accumulated depreciation | (1,744,436) | | Net property and equipment | \$
32,085 | Depreciation expense incurred for the year ended December 31, 2020 was \$10,695. # Note 9 – Income Taxes The Company participates in the consolidated federal income tax return of NLHC. The Company recognized a current federal income tax benefit of \$14,323 for the year ended December 31, 2020. The Company also recorded a current state income tax expense of \$2,424 for the year ended December 31, 2020. The components of current and deferred income tax are shown below: | | 2020 | | | |--------------------------|---------------|--|--| | Current | \$
11,899 | | | | Deferred | 100,571 | | | | Total income tax benefit | \$
112,470 | | | Income tax receivable from NLHC was \$1,923 as of December 31, 2020. In 2020, total taxes are approximately 20% of the total computed using the statutory federal income tax rate of 21%. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2017. The Company net settled \$93,472 of its income taxes recoverable from NLHC for the year ended December 31, 2020. In addition, the Company paid \$2,894 in state taxes for the year ended December 31, 2020. There were no amounts accrued for unrecognized tax benefits or related interest and penalties as of December 31, 2020. # Note 10 – Related Party Transactions It is possible that the terms of the transactions mentioned below are not the same as those that would result from transactions among unrelated parties. #### Commissions and Revenue Sharing The Company is the distributor of variable universal life products issued by NLIC and offers indexed annuity products issued by LSW. In connection with the distribution of these products, the Company records commission expense equivalent to 100% of commission revenue recognized. Commission revenue and expense recorded in accordance with the sale of NLIC variable universal life and LSW indexed annuity {20}------------------------------------------------ # Note 10 – Related Party Transactions (continued) products were \$3,049,205 for the year ended December 31, 2020. The Company recognized revenue sharing on the sale of NLIC and LSW products of \$250,546 for the year ended December 31, 2020. # Allocated Expenses NLIC provides the Company with occupancy, information technology, administrative services and access to its distribution network. The charges for these services and other shared services are allocated based on the terms of the expense sharing agreements with NLIC and NLVF. The allocation methodologies employed are applied uniformly across National Life Group and are based on direct charges and other factors (e.g., square footage, number of employees, compensation levels, et. al.). Charges for costs allocated to the Company for the year ended December 31, 2020 were \$2,453,399. As of December 31, 2020, accounts payable to, and receivable balances from, NLVF and affiliates related to expense sharing agreements were \$776,135 and \$22,606, respectively. The accounts payable and receivable balances related to NLVF and affiliates are settled in the normal course of business and are included in the Due to affiliates and Due from affiliates in the Statement of Financial Condition. # Capital Contributions The Company has experienced losses from operations and has an accumulated deficit of \$44,084,136 as of December 31, 2020. The Company has historically received sufficient equity contributions from its parent, NLVF, which has enabled it to exceed its regulatory requirements over net capital. Throughout the fiscal year ended December 31, 2020, the Company had sufficient net capital in excess of the regulatory requirement and did not require a capital contribution from NLVF. # Note 11 – Commitments and Contingencies The Company clears a portion of its securities transactions through a clearing broker on a fully disclosed basis. Pursuant to the terms of the agreement between the Company and the clearing broker, the clearing broker has the right to charge the Company for losses that result from a counterparty's failure to fulfill its contractual obligations. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing broker, the Company believes there is no maximum amount assignable to this right. As of December 31, 2020, the Company has no indication that it has not fulfilled its contractual obligations and has not recorded a liability with regard to the right. In addition, the Company has the right to pursue collection or performance from the counterparties who do not perform under their contractual obligations. The Company monitors the credit standing of the clearing broker and counterparties with which it conducts business. In the ordinary course of business, the nature of the Company's business subjects it to claims, lawsuits, regulatory examinations and other proceedings. These claims typically include legal theories that are common in lawsuits brought by retail investors, such as improper sales practices, unsuitability, breach of fiduciary duty and other claims related to the sale of investment products. The results of these matters cannot be predicted with certainty. The Company continues to vigorously defend its position related to these matters. However, it is uncertain whether there could be unfavorable outcomes that will result in a material adverse impact to the Company. {21}------------------------------------------------ # Equity Services, Inc. (A wholly-owned Subsidiary of NLV Financial Corporation) Supplemental Schedule I Computation of Net Capital Under Rule 15c3-1 of the Securities and Exchange Commission December 31, 2020 | | 2020 | |--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------| | Computation of net capital
Total ownership equity from Statement of Financial Condition | \$
7,015,230 | | Deduct ownership equity not allowable for net capital
Total ownership equity qualified for net capital | -
7,015,230 | | Deductions | | | Receivables from non-customers, in excess of payable | 2,245,372 | | Investment in and receivables from affiliates, subsidiaries and associated partnerships
Property, furniture, equipment, leasehold improvements and rights under lease agreements, | 22,606 | | at cost-net of accumulated depreciation | 32,085 | | Other assets | 439,331 | | Total non-allowable assets | 2,739,394 | | Net capital before haircuts on securities position and other deductions | 4,275,836 | | Haircut on securities | — | | Other deductions | — | | Net capital | \$
4,275,836 | | Computation of aggregate indebtedness | | | Payable to non-customers | \$
5,324,827 | | Accounts payable, accrued liabilities, accrued expenses and other | 1,581,842 | | Total aggregate indebtedness | \$
6,906,669 | | Computation of basic net capital requirement | | | Minimum net capital requirement (greater of \$100,000 or 6 2/3% of aggregate indebtedness) | \$
460,445 | | Excess net capital | \$
3,815,391 | | Net capital less 10% of aggregate indebtedness | \$
3,585,170 | | Percentage of aggregate indebtedness to net capital | 162% | There were no material differences between the amounts presented above and the amounts reported on the Company's unaudited FOCUS Report as of December 31, 2020. {22}------------------------------------------------ # Equity Services, Inc. (A wholly-owned Subsidiary of NLV Financial Corporation) Supplemental Schedule II Statement Regarding Rule 15c3-3 of the Securities and Exchange Commission December 31, 2020 The operations of the Company do not include the physical handling of securities or the maintenance of open customer accounts. Such activities are performed by the Company's clearing broker on a fully disclosed basis for brokerage business or by the product offeror for subscription way basis business. The operations of the Company do not include directly or indirectly receiving, holding, or otherwise owing funds or securities for or to customers; other than money or other consideration received and promptly transmitted in compliance with Rule 15c2-4(a) or (b)(2). Accordingly, the Company claims that the reserve provisions of Rule 15c3-3 of the Act do not apply under the exemption allowed by paragraph (k)(2)(ii) of such rule for brokerage business activities and under the exemption allowed by Footnote 74 of the SEC Release No. 34-70073 for subscription way business activities. As such the Company has not included the schedules "Computation for Determination of Reserve Requirement under Rule 15c3-3" or "Information relating to Possession or Control Requirements under Rule 15c3-3." Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.