Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
o
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: 001-34516
Cowen Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
27-0423711
(I.R.S. Employer
Identification No.)
599 Lexington Avenue
New York, New York
(Address of Principal Executive Offices)
10022
(Zip Code)
(646) 562-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Exchange on Which Registered
Class A Common Stock, par value $0.01 per share
 
COWN
 
The Nasdaq Global Market
7.35% Senior Notes due 2027
 
COWNZ
 
The Nasdaq Global Market
7.75% Senior Notes due 2033
 
COWNL
 
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
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 Q    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes  Q  No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer Q
 
Non-accelerated filer o

 
Smaller reporting company o
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No Q
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 11, 2019, there were 29,014,359 shares of the registrant's common stock outstanding.
 


Table of Contents

Item No.
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





2




Special Note Regarding Forward-Looking Statements
We have made statements in this Quarterly Report on Form 10-Q (including in “Management's Discussion and Analysis of Financial Condition and Results of Operations”) that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking terms such as “may,” “might,” “will,” “would,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “possible,” “potential,” “intend,” “seek” or “continue,” the negative of these terms and other comparable terminology or similar expressions. In addition, our management may make forward-looking statements to analysts, representatives of the media and others. These forward-looking statements represent only the Company's beliefs regarding future events (many of which, by their nature, are inherently uncertain and beyond our control) and are predictions only, based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. In particular, you should consider the risks contained in Item 1A of this periodic report on Form 10-Q for the quarterly period ended September 30, 2019.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations.
Unaudited Condensed Consolidated Financial Statements are presented for the three and nine months ended September 30, 2019 and 2018. The Consolidated Financial Statements as of December 31, 2018 were audited.



3

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Cowen Inc.
Condensed Consolidated Statements of Financial Condition
(dollars in thousands, except share and per share data)
(unaudited)
Assets
As of September 30, 2019
 
As of December 31, 2018
Cash and cash equivalents
$
260,994

 
$
259,148

Cash collateral pledged
18,609

 
6,318

Segregated cash
128,782

 
176,647

Securities owned, at fair value ($132,555 and $57,583 were pledged to various parties)
922,164

 
520,888

Receivable on derivative contracts, at fair value
39,754

 
25,125

Securities borrowed
1,228,036

 
407,795

Other investments ($131,740 and $123,241 at fair value, respectively)
204,168

 
181,407

Deposits with clearing organizations, brokers and banks
91,450

 
89,423

Receivable from brokers, dealers and clearing organizations, net of allowance of $719 and $472, respectively
717,634

 
786,113

Receivable from customers, net of allowance of $623 and $516, respectively
46,126

 
37,858

Fees receivable, net of allowance of $1,399 and $1,569, respectively
101,508

 
111,946

Due from related parties
27,849

 
33,870

Fixed assets, net of accumulated depreciation and amortization of $31,007 and $31,630, respectively
29,977

 
26,443

Operating lease right-of-use assets
96,664

 

Goodwill
137,728

 
60,678

Intangible assets, net of accumulated amortization of $47,878 and $38,093, respectively
37,358

 
24,943

Deferred tax asset, net
84,041

 
93,057

Other assets
76,916

 
79,014

Consolidated Funds
 
 
 
Cash and cash equivalents
3,364

 
38,118

Securities owned, at fair value
369,191

 
187,633

Receivable on derivative contracts, at fair value
3,885

 
4,416

Other investments
171,186

 
186,395

Receivable from brokers
17,907

 
8,328

Other assets
1,463

 
740

Total Assets
$
4,816,754

 
$
3,346,303

Liabilities and Stockholders' Equity
 
 
 
Liabilities
 
 
 
Securities sold, not yet purchased, at fair value
$
364,742

 
$
195,307

Securities sold under agreements to repurchase
23,772

 

Payable for derivative contracts, at fair value
32,755

 
16,082

Securities loaned
1,339,647

 
414,852

Payables to brokers, dealers and clearing organizations
271,012

 
228,731

Payable to customers
525,064

 
525,153

Commission management payable
89,124

 
95,270

Compensation payable
157,125

 
226,971

Operating lease liabilities
100,934

 

Notes payable and other debt
343,286

 
262,965

Convertible debt
117,469

 
134,489

Fees payable
33,625

 
22,565

Due to related parties
919

 
571

Accounts payable, accrued expenses and other liabilities
142,026

 
110,423

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Financial Condition
(dollars in thousands, except share and per share data)
(unaudited)
 
As of September 30, 2019
 
As of December 31, 2018
(continued)
 
 
 
Consolidated Funds
 
 
 
Due to related parties
615

 

Payable for derivative contracts, at fair value
7,778

 
1,663

Payable to brokers
15,166

 
23,521

Capital withdrawals payable
1,002

 
11,106

Accounts payable, accrued expenses and other liabilities
455

 
424

Total Liabilities
$
3,566,516

 
$
2,270,093

Commitments and Contingencies (Note 17)

 

Temporary Equity
 
 
 
Redeemable non-controlling interests
$
348,424

 
$
216,923

Permanent Equity
 
 
 
Cowen Inc. stockholders' equity
 
 
 
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized, 120,750 shares issued and outstanding as of September 30, 2019 (aggregate liquidation preference of $120,750,000) and 10,000,000 shares authorized, 120,750 shares issued and outstanding as of December 31, 2018 (aggregate liquidation preference of $120,750,000), respectively
$
1

 
$
1

Class A common stock, par value $0.01 per share: 62,500,000 shares authorized, 46,476,113 shares issued and 29,013,137 outstanding as of September 30, 2019 and 62,500,000 shares authorized, 43,774,731 shares issued and 28,437,860 outstanding as of December 31, 2018, respectively (including 216,912 and 253,772 restricted shares, respectively)
334

 
324

Class B common stock, par value $0.01 per share: 62,500,000 authorized, no shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively

 

Additional paid-in capital
1,103,941

 
1,062,877

(Accumulated deficit) retained earnings
(20,334
)
 
(34,648
)
Accumulated other comprehensive income (loss)
(5
)
 
(5
)
Less: Class A common stock held in treasury, at cost, 17,462,976 and 15,336,871 shares as of September 30, 2019 and December 31, 2018, respectively
(266,882
)
 
(234,142
)
Total Cowen Inc. Stockholders' Equity
817,055

 
794,407

Nonredeemable non-controlling interests
84,759

 
64,880

Total Permanent Equity
$
901,814

 
$
859,287

Total Liabilities, Temporary Equity and Permanent Equity
$
4,816,754

 
$
3,346,303


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Investment banking
$
77,292

 
$
81,923

 
$
272,103

 
$
264,737

Brokerage
93,995

 
92,035

 
302,840

 
301,053

Management fees
7,300

 
7,546

 
21,480

 
22,336

Incentive income
701

 
33

 
724

 
97

Interest and dividends
60,707

 
26,448

 
129,846

 
77,511

Reimbursement from affiliates
238

 
353

 
780

 
1,066

Aircraft lease revenue

 
375

 

 
1,509

Reinsurance premiums
8,146

 
8,378

 
29,068

 
26,251

Other revenues
1,237

 
1,634

 
3,228

 
3,846

Consolidated Funds
 
 
 
 
 
 
 
Interest and dividends
2,374

 
2,294

 
8,148

 
8,565

Other revenues
57

 
9

 
91

 
14

Total revenues
252,047

 
221,028

 
768,308

 
706,985

Interest and dividends expense
56,477

 
26,000

 
125,089

 
74,846

Total net revenues
195,570

 
195,028

 
643,219

 
632,139

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Employee compensation and benefits
120,320

 
128,483

 
388,611

 
397,543

Brokerage and trade execution costs
25,808

 
23,217

 
78,578

 
82,317

Underwriting expenses
2,846

 
4,412

 
12,383

 
13,260

Professional, advisory and other fees
15,535

 
7,698

 
39,396

 
20,541

Service fees
5,943

 
4,880

 
17,266

 
14,927

Communications
8,295

 
7,894

 
24,654

 
22,566

Occupancy and equipment
9,784

 
10,140

 
30,160

 
30,385

Depreciation and amortization
5,082

 
3,139

 
14,990

 
9,558

Client services and business development
10,364

 
6,671

 
33,549

 
22,767

Goodwill impairment

 

 
4,100

 

Reinsurance claims, commissions and amortization of deferred acquisition costs
8,195

 
8,773

 
25,139

 
27,428

Other expenses
5,276

 
5,335

 
14,929

 
15,007

Consolidated Funds
 
 
 
 
 
 
 
Interest and dividends
1,153

 
1,270

 
3,376

 
5,660

Professional, advisory and other fees
857

 
191

 
1,375

 
748

Brokerage and trade execution costs
15

 
39

 
103

 
192

Other expenses
491

 
187

 
1,375

 
667

Total expenses
219,964

 
212,329

 
689,984

 
663,566

Other income (loss)
 
 
 
 
 
 
 
Net gains (losses) on securities, derivatives and other investments
18,446

 
32,040

 
61,440

 
64,728

Gain/(loss) on debt extinguishment

 

 

 
(556
)
Consolidated Funds
 
 
 
 
 
 
 
Net realized and unrealized gains (losses) on investments and other transactions
13,613

 
8,280

 
22,793

 
52,284

Net realized and unrealized gains (losses) on derivatives
293

 
1,664

 
(1,188
)
 
6,258

Net gains (losses) on foreign currency transactions
(10
)
 
(2
)
 
(69
)
 
250

Total other income (loss)
32,342

 
41,982

 
82,976

 
122,964

Income (loss) before income taxes
7,948

 
24,681

 
36,211

 
91,537

Income tax expense (benefit)
1,365

 
5,083

 
9,615

 
15,999

Net income (loss)
6,583

 
19,598

 
26,596

 
75,538

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
(continued)
 
 
 
 
 
 
 
Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds
2,770

 
4,110

 
7,188

 
37,798

Net income (loss) attributable to Cowen Inc.
3,813

 
15,488

 
19,408

 
37,740

Preferred stock dividends
1,698

 
1,698

 
5,094

 
5,094

Net income (loss) attributable to Cowen Inc. common stockholders
$
2,115

 
$
13,790

 
$
14,314

 
$
32,646

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 
 
 

Basic
29,529

 
29,610

 
29,687

 
29,662

Diluted
31,264

 
30,844

 
31,381

 
30,613

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.07

 
$
0.47

 
$
0.48

 
$
1.10

Diluted
$
0.07

 
$
0.45

 
$
0.46

 
$
1.07


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


Table of Contents


Cowen Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(dollars in thousands)
(unaudited)




 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
 
 
$
6,583

 
 
 
$
19,598

 
 
 
$
26,596

 
 
 
$
75,538

   Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
(2
)
 
 
 
4

 
 
 

 
 
 
5

 
 
   Total other comprehensive income (loss), net of tax
 
 
(2
)
 
 
 
4

 
 
 

 
 
 
5

Comprehensive income (loss)
 
 
$
6,581

 
 
 
$
19,602

 
 
 
$
26,596

 
 
 
$
75,543

    Less: Comprehensive income attributable to non-controlling interests
 
 
2,770

 
 
 
4,110

 
 
 
7,188

 
 
 
37,798

Comprehensive income (loss) attributable to Cowen Inc.
 
 
$
3,811

 
 
 
$
15,492

 
 
 
$
19,408

 
 
 
$
37,745


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Changes in Equity
(dollars in thousands, except share data)

 
Common Shares Outstanding
 
Common Stock
 
Preferred Shares Outstanding
 
Preferred Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings/ (Accumulated deficit)
 
Total Cowen Inc. Stockholders' Equity
 
Nonredeemable Non-controlling Interests
 
Total Permanent Equity
 
Redeemable Non-controlling Interest
Balance, June 30, 2019
29,480,287

 
$
334

 
120,750

 
$
1

 
$
(254,357
)
 
$
1,093,898

 
$
(3
)
 
$
(22,449
)
 
$
817,424

 
$
75,923

 
$
893,347

 
$
359,643

Net income (loss) attributable to Cowen Inc.

 

 

 

 

 

 

 
3,813

 
3,813

 

 
3,813

 

Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds

 

 

 

 

 

 

 

 

 
9,618

 
9,618

 
(6,848
)
Foreign currency translation

 

 

 

 

 

 
(2
)
 

 
(2
)
 

 
(2
)
 

Capital contributions

 

 

 

 

 

 

 

 

 
332

 
332

 
21,905

Capital withdrawals

 

 

 

 

 

 

 

 

 
(1,114
)
 
(1,114
)
 
(26,276
)
Restricted stock awards issued
331,213

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(798,363
)
 

 

 

 
(12,525
)
 

 

 

 
(12,525
)
 

 
(12,525
)
 
 
Preferred stock dividends, $0.06/share (See Note 19)

 

 

 

 

 

 

 
(1,698
)
 
(1,698
)
 

 
(1,698
)
 

Amortization of share-based compensation

 

 

 

 

 
10,043

 

 

 
10,043

 

 
10,043

 

Balance, September 30, 2019
29,013,137

 
$
334

 
120,750

 
$
1

 
$
(266,882
)
 
$
1,103,941

 
$
(5
)
 
$
(20,334
)
 
$
817,055

 
$
84,759


$
901,814

 
$
348,424

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Shares Outstanding
 
Common Stock
 
Preferred Shares Outstanding
 
Preferred Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings/ (Accumulated deficit)
 
Total Cowen Inc. Stockholders' Equity
 
Nonredeemable Non-controlling Interests
 
Total Permanent Equity
 
Redeemable Non-controlling Interest
Balance, June 30, 2018
29,609,472

 
$
324

 
120,750

 
$
1

 
$
(208,009
)
 
$
1,052,717

 
$
(7
)
 
$
(51,819
)
 
$
793,207

 
$
67,407

 
$
860,614

 
$
342,944

Net income (loss) attributable to Cowen Inc.

 

 

 

 

 

 

 
15,488

 
15,488

 

 
15,488

 

Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and funds

 

 

 

 

 

 

 

 

 
2,622

 
2,622

 
1,487

Foreign currency translation

 

 

 

 

 

 
4

 

 
4

 

 
4

 

Capital contributions

 

 

 

 

 

 

 

 

 
382

 
382

 
5,659

Capital withdrawals

 

 

 

 

 

 

 

 

 
(1,452
)
 
(1,452
)
 
(218,732
)
Restricted stock awards issued
30,228

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(497,153
)
 

 

 

 
(7,314
)
 

 

 

 
(7,314
)
 

 
(7,314
)
 

Preferred stock dividends (See Note 19)

 

 

 

 

 

 

 
(1,698
)
 
(1,698
)
 

 
(1,698
)
 

Embedded cash conversion option (See Note 19)

 

 

 

 

 
1

 

 

 
1

 

 
1

 

Amortization of share-based compensation

 

 

 

 

 
8,556

 

 

 
8,556

 
 
 
8,556

 

Balance, September 30, 2018
29,142,547

 
$
324

 
120,750

 
$
1

 
$
(215,323
)
 
$
1,061,274

 
$
(3
)
 
$
(38,029
)
 
$
808,244

 
$
68,959

 
$
877,203

 
$
131,358




9


Table of Contents

 
Common Shares Outstanding
 
Common Stock
 
Preferred Shares Outstanding
 
Preferred Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings/ (Accumulated deficit)
 
Total Cowen Inc. Stockholders' Equity
 
Nonredeemable Non-controlling Interests
 
Total Permanent Equity
 
Redeemable Non-controlling Interest
Balance, December 31, 2018
28,437,860

 
$
324

 
120,750

 
$
1

 
$
(234,142
)
 
$
1,062,877

 
$
(5
)
 
$
(34,648
)
 
$
794,407

 
$
64,880

 
$
859,287

 
$
216,923

Net income (loss) attributable to Cowen Inc.

 

 

 

 

 

 

 
19,408

 
19,408

 

 
19,408

 

Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds

 

 

 

 

 

 

 

 

 
11,375

 
11,375

 
(4,187
)
Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

Capital contributions

 

 

 

 

 

 

 

 

 
11,442

 
11,442

 
213,391

Capital withdrawals

 

 

 

 

 

 

 

 

 
(2,938
)
 
(2,938
)
 
(77,703
)
Restricted stock awards issued
1,668,032

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(2,126,105
)
 

 

 

 
(32,740
)
 

 

 

 
(32,740
)
 

 
(32,740
)
 

Common stock issuance upon acquisition (See Note 3)
1,033,350

 
10

 

 

 

 
14,436

 

 

 
14,446

 

 
14,446

 

Preferred stock dividends, $0.06/share (See Note 19)

 

 

 

 

 

 

 
(5,094
)
 
(5,094
)
 

 
(5,094
)
 

Embedded cash conversion option, net of tax (See Note 19)

 

 

 

 

 
(596
)
 

 

 
(596
)
 

 
(596
)
 

Amortization of share-based compensation

 

 

 

 

 
27,224

 

 

 
27,224

 

 
27,224

 

Balance, September 30, 2019
29,013,137

 
$
334

 
120,750

 
$
1

 
$
(266,882
)
 
$
1,103,941

 
$
(5
)
 
$
(20,334
)
 
$
817,055

 
$
84,759

 
$
901,814

 
$
348,424

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Shares Outstanding
 
Common Stock
 
Preferred Shares Outstanding
 
Preferred Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings/ (Accumulated deficit)
 
Total Cowen Inc. Stockholders' Equity
 
Nonredeemable Non-controlling Interests
 
Total Permanent Equity
 
Redeemable Non-controlling Interest
Balance, December 31, 2017
29,632,020

 
$
324

 
120,750

 
$
1

 
$
(186,846
)
 
$
1,004,664

 
$
(8
)
 
$
(70,116
)
 
$
748,019

 
$
105,588

 
$
853,607

 
$
335,016

Cumulative effect of the adoption of the new revenue recognition standard (See Note 2)

 

 

 

 

 

 

 
(559
)
 
(559
)
 

 
(559
)
 

Net income (loss) attributable to Cowen Inc.

 

 

 

 

 

 

 
37,740

 
37,740

 

 
37,740

 

Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and funds

 

 

 

 

 

 

 

 

 
15,297

 
15,297

 
22,501

Foreign currency translation

 

 

 

 

 

 
5

 

 
5

 

 
5

 

Capital contributions

 

 

 

 

 

 

 

 

 
7,887

 
7,887

 
17,648

Capital withdrawals

 

 

 

 

 

 

 

 

 
(27,254
)
 
(27,254
)
 
(243,807
)
Deconsolidation of entity

 

 

 

 

 

 

 

 

 
(32,559
)
 
(32,559
)
 

Restricted stock awards issued
1,469,983

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock, at cost
(1,959,456
)
 

 

 

 
(28,477
)
 

 

 

 
(28,477
)
 

 
(28,477
)
 

Preferred stock dividends (See Note 19)

 

 

 

 

 

 

 
(5,094
)
 
(5,094
)
 

 
(5,094
)
 

Embedded cash conversion option (See Note 19)

 

 

 

 

 
28,974

 

 

 
28,974

 

 
28,974

 

Amortization of share-based compensation

 

 

 

 

 
27,636

 

 

 
27,636

 

 
27,636

 

Balance, September 30, 2018
29,142,547

 
$
324

 
120,750

 
$
1

 
$
(215,323
)

$
1,061,274


$
(3
)

$
(38,029
)
 
$
808,244

 
$
68,959

 
$
877,203

 
$
131,358


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

10


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands
(unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
26,596

 
$
75,538

Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities:
 
 
 
Depreciation and amortization
14,990

 
9,558

Amortization of debt issuance costs
804

 
990

Amortization of debt discount
3,511

 
4,177

Noncash lease expense
(2,607
)
 

Gain / (loss) on extinguishment of debt

 
652

Share-based compensation
27,224

 
27,636

Change in deferred taxes
8,420

 
14,640

Deferred rent obligations

 
(2,532
)
Net loss (gain) on disposal of fixed assets
(367
)
 
146

Goodwill impairment
4,100

 

Purchases of securities owned, at fair value
(1,405,478
)
 
(3,137,168
)
Proceeds from sales of securities owned, at fair value
1,282,527

 
3,329,707

Proceeds from sales of securities sold, not yet purchased, at fair value
902,271

 
2,132,935

Payments to cover securities sold, not yet purchased, at fair value
(939,072
)
 
(2,233,427
)
Proceeds from other investments
19,693

 
7,313

Net (gains) losses on securities, derivatives and other investments
(57,808
)
 
(61,927
)
Consolidated Funds
 
 
 
Purchases of securities owned, at fair value
(2,016,225
)
 
(457,293
)
Proceeds from sales of securities owned, at fair value
1,880,160

 
491,427

Purchases of other investments
(2,798
)
 
(1,414
)
Proceeds from other investments
23,865

 
230,832

Net realized and unrealized (gains) losses on investments and other transactions
(51,925
)
 
(58,523
)
(Increase) decrease in operating assets:
 
 
 
Securities owned, at fair value, held at broker-dealer
(250,579
)
 
(124,740
)
Receivable on derivative contracts, at fair value
(14,629
)
 
36,949

Securities borrowed
(820,241
)
 
(270,140
)
Deposits with clearing organizations, brokers and banks
(2,027
)
 
(4,650
)
Receivable from brokers, dealers and clearing organizations
68,479

 
(136,214
)
Receivable from customers, net of allowance
(8,268
)
 
16,651

Fees receivable, net of allowance
17,707

 
(6,211
)
Due from related parties
6,020

 
2,765

Other assets
1,038

 
16,573

Consolidated Funds
 
 
 
Cash and cash equivalents
34,809

 
(130
)
Receivable on derivative contracts, at fair value
531

 
609

Receivable from brokers
(9,579
)
 
(5,373
)
Other assets
10

 
(153
)
Increase (decrease) in operating liabilities:
 
 
 
Securities sold, not yet purchased, at fair value, held at broker-dealer
191,640

 
146,853

Securities sold under agreement to repurchase
23,772

 

Payable for derivative contracts, at fair value
16,672

 
16,225

Securities loaned
924,795

 
91,798

Payable to brokers, dealers and clearing organizations
42,281

 
(41,827
)
Payable to customers
(88
)
 
118,009

Commission management payable
(6,146
)
 
19,782

Compensation payable
(92,903
)
 
33,395

Fees payable
11,060

 
14,211

Due to related parties
(4,402
)
 
1

Accounts payable, accrued expenses and other liabilities
(2,679
)
 
1,527

 
 
 
 
 
 
 
 
 
 
 
 

11


Table of Contents

Cowen Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands
(unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
 
 
 
 
 
 
 
 
(continued)
 
 
 
Consolidated Funds
 
 
 
Payable to brokers
(8,355
)
 
1,185

Payable for derivative contracts, at fair value
6,115

 
(4,941
)
Due to related parties
615

 

Accounts payable, accrued expenses and other liabilities
(184
)
 
205

Net cash provided by / (used in) operating activities
(156,655
)
 
295,626

Cash flows from investing activities:
 
 
 
Purchases of other investments
(15,899
)
 
(21,355
)
Purchase of business (See Note 3)
(48,581
)
 

Proceeds from sales of other investments
18,103

 
15,730

Proceeds from loans held for investment

 
1,410

Purchase of fixed assets
(7,862
)
 
(6,710
)
Net cash provided by / (used in) investing activities
(54,239
)
 
(10,925
)
Cash flows from financing activities:
 
 
 
Repayments on convertible debt
(20,860
)
 
(13,500
)
Deferred debt issuance cost
(1,480
)
 
(3,985
)
Borrowings on notes and other debt
84,640

 
102,382

Repayments on notes and other debt
(7,834
)
 
(6,561
)
Purchase of treasury stock
(10,153
)
 
(16,763
)
Contingent liability payment
(1,235
)
 
(797
)
Capital contributions by non-controlling interests in operating entities
11,110

 
941

Capital withdrawals to non-controlling interests in operating entities
(1,713
)
 
(1,685
)
Consolidated Funds
 
 
 
Capital contributions by non-controlling interests in Consolidated Funds
213,723

 
24,594

Capital withdrawals to non-controlling interests in Consolidated Funds
(89,032
)
 
(270,186
)
Net cash provided by / (used in) financing activities
177,166

 
(185,560
)
Change in cash and cash equivalents
(33,728
)
 
99,141

Cash and cash equivalents, including cash collateral pledged and segregated cash, beginning of period
442,113

 
264,208

Cash and equivalents at end of period:
 
 
 
    Cash and cash equivalents
260,994

 
193,066

    Cash collateral pledged
18,609

 
16,092

    Segregated cash
128,782

 
154,191

Cash and cash equivalents, including cash collateral pledged and segregated cash, end of period
$
408,385

 
$
363,349

Supplemental information
 
 
 
Cash paid during the year for interest
$
98,363

 
$
62,371

Cash paid during the year for taxes
$
3,815

 
$
4,862

Supplemental non-cash information
 
 
 
Purchase of treasury stock, at cost, through net settlement (See Note 19)
$
22,420

 
$
8,544

Preferred stock dividends declared (See Note 19)
$
5,094

 
$
5,094

Net assets (liabilities) acquired upon acquisition (net of cash)
$
90,727

 
$

Transfer of investment from consolidated funds, securities owned, fair value to securities owned, fair value
$

 
$
8,820

Initial recognition of operating lease right-of-use assets
$
103,694

 
$

Initial recognition of operating lease liabilities
$
110,505

 
$

Noncash transfer of net assets from Unconsolidated Master Fund to Consolidated Fund
$
97,655

 
$

Net decrease in non-controlling interests in Consolidated Funds due to deconsolidation of consolidated fund (See Note 2)
$

 
$
32,559

Separately recognized conversion option reclassification from a derivative liability to equity (Note 19)
$

 
$
28,974

Common stock issuance upon close of acquisition (see Note 3)
$
14,446

 
$

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Index
Notes to Condensed Consolidated Financial Statements
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


13


Table of Contents
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

1. Organization and Business
Cowen Inc., a Delaware corporation formed in 2009, is a diversified financial services firm that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment management, investment banking, research, sales and trading, prime brokerage, global clearing and commission management services through its two business segments: the Operating Company (“Op Co”) and the Asset Company (“Asset Co”).
The Op Co segment consists of four divisions: the Investment Banking division, the Markets division, the Research division and the Cowen Investment Management (“CIM”) division. The Company refers to the Investment Banking division, the Markets division and the Research division combined as its investment banking businesses. Op Co's investment banking businesses offer investment banking, research, sales and trading, prime brokerage, global execution, clearing and commission management services to companies and primarily institutional investor clients. Sectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, consumer, industrials, information and technology services, and energy. Op Co’s CIM division includes advisers to investment funds (including private equity structures and privately placed hedge funds) and registered funds.
The Asset Co segment consists of certain of the Company’s private investments, private real estate investments and other legacy multi-sector long/short equity strategies. The focus of Asset Co is to drive future monetization of the invested capital of the segment.
Change in Segments
As noted in the prior reporting period, the Company continually monitors and reviews its segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact its reportable segments. Because of the change in the Chief Operating Decision Maker (“CODM”) of the Company at the end of 2017, the Company experienced a strategic shift to refocus the Company’s businesses on a set of differentiated products which are aligned to the content and insight within the Company’s domain of expertise.
During the second quarter of 2019, the Company realigned the business and reportable segment information that the CODM regularly reviews to evaluate performance for operating decision-making purposes, including evaluation and allocation of resources.  As a result, the Company changed its segment reporting structure based on the Company's domain expertise as a driver of balance sheet harmonization and repeatable revenues for its operating business versus the Company’s long-term monetization strategies.
As a result of the change in segments, during the second quarter of 2019, the Company has the following business segments:
The Op Co segment consists of four divisions: Investment Banking, Markets, Research and Cowen Investment Management. Each of Op Co’s four divisions leverage the Research division’s core domain expertise to drive harmonized repeatable revenue for the segment.
The Investment Banking division includes public and private capital raising transactions and providing strategic advisory services.
The Markets division includes trading equity and equity-linked securities on behalf of institutional investors as well as a full-service suite of prime brokerage services, cross-asset trading, securities finance, global execution, clearing and commission management businesses.
The Research division provides the thought leadership and domain expertise that drives Cowen DNA. The research content that is created helps to facilitate brokerage revenue in the Markets division, drive deal flow in the Investment Banking division and facilitate investor relationships and investing within CIM’s innovative investment products and solutions.
The CIM division offers innovative investment products and solutions across the liquidity spectrum to institutional and private clients. CIM offers investors access to a number of strategies to meet their specific needs including merger arbitrage, activism, healthcare royalties, private healthcare investing and private sustainable investing which leverage the content and domain expertise that are aligned with the Company's core areas of expertise ("Cowen DNA").
The Asset Co segment consists of certain of the Company’s private investments, private real estate investments and other legacy multi-strategy funds. While the Asset Co segment is not a reportable segment, the Company will provide segment level information for Asset Co.

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Table of Contents
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

2. Significant Accounting Policies
a. Basis of Presentation
These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") as promulgated by the Financial Accounting Standards Board ("FASB") through Accounting Standards Codification (the "Accounting Standards") as the source of authoritative accounting principles in the preparation of financial statements, and include the accounts of the Company, its operating and other subsidiaries, and entities in which the Company has a controlling financial interest or a general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in these accompanying condensed consolidated financial statements, as further discussed below, are not subject to the consolidation provisions with respect to their own controlled investments pursuant to their specialized accounting.
The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Funds in which the Company has a controlling financial interest are consolidated with the Company pursuant to US GAAP as described below. Consequently, the Company's condensed consolidated financial statements reflect the assets, liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds that are not owned by the Company are reflected as redeemable or non-redeemable non-controlling interests in consolidated subsidiaries in the accompanying condensed consolidated financial statements. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.
In this Form 10-Q, nonredeemable non-controlling interests for the three and nine months ended September 30, 2019 and 2018, respectively, have been reclassified to be presented separately from redeemable non-controlling interests within the permanent equity section of the accompanying condensed consolidated statements of financial condition. The Company carried out an analysis to evaluate instances where non-controlling interest parties have the unilateral right to redeem their ownership interest for cash, which resulted in a change to the presentation of certain nonredeemable non-controlling interests into permanent equity. Accordingly, prior period amounts have been recast to reflect the change to the presentation of nonredeemable non-controlling interests, which has no impact on net income (loss) attributable to Cowen Inc. common stockholders, total assets or total liabilities.
With respect to the Company’s private equity investment management strategies, a portion of the Company's carried interest is granted to employees through profit sharing awards designed to more closely align compensation with the overall realized performance of the Company. These arrangements enable certain employees to earn compensation based on performance revenue earned by the Company and are recorded within compensation payable in the accompanying condensed consolidated statements of financial condition and employee compensation and benefits expense in the accompanying condensed consolidated statements of operation based on the probable and estimable payments under the terms of the awards. Prior period amounts have been recast to reflect this accounting treatment.
The year-end condensed balance sheet data was derived from the audited financial statements, but does not include all disclosures included in the audited financial statements.
b.
Principles of consolidation
The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those investment funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company consolidates all variable interest entities for which it is the primary beneficiary.
In accordance with these standards, the Company consolidates five investment funds for which it acts as the general partner and investment manager. As of September 30, 2019, the Company consolidated the following investment funds: Ramius Enterprise LP (“Enterprise LP”), Ramius Merger Fund LLC (the "Merger Fund"), Cowen Private Investments LP ("Cowen Private"), Ramius Merger Arbitrage UCITS Fund ("UCITS Fund"), and Cowen Sustainable Investments I LP ("CSI I LP") (each a "Consolidated Fund" and collectively the "Consolidated Funds").
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting operating entity ("VOE") or a variable interest entity ("VIE") under US GAAP.
Voting Operating EntitiesVOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently, (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance and (iii) voting rights of equity holders are proportionate to their obligation to absorb losses or the right to receive returns.

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Table of Contents
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Under US GAAP, the usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. Accordingly, the Company consolidates all VOEs in which it owns a majority of the entity's voting shares or units.
Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP consolidation model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, is considered to be the primary beneficiary of the VIE and thus is required to consolidate it.
The Company reconsiders whether it is the primary beneficiary of a VIE by performing a periodic qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the design of the VIE. As of September 30, 2019, the total assets and total liabilities of the consolidated VIEs were $656.4 million and $34.3 million, respectively. As of December 31, 2018, the total assets and total liabilities of the consolidated VIEs were $468.0 million and $40.5 million, respectively. The increase is primarily related to other investors' subscriptions which increased overall VIEs net assets. The VIEs act as investment managers and/or investment companies that may be managed by the Company or the Company may have equity interest in those investment companies. The VIEs are financed through their operations and/or loan agreements with the Company.
As of September 30, 2019, the Company held a variable interest in Ramius Merger Master Fund Ltd ("Merger Master") (the “Unconsolidated Master Fund”) through the consolidated Merger Fund. As of December 31, 2018, the Company held variable interests in Ramius Enterprise Master Fund Ltd (“Enterprise Master”) and Ramius Merger Master Fund Ltd ("Merger Master") (collectively the “Unconsolidated Master Funds”) through two Consolidated Funds. Investment companies, which account for their investments under the specialized industry accounting guidance for investment companies prescribed under US GAAP, are not subject to the consolidation provisions for their investments. Therefore, the Company has not consolidated the Unconsolidated Master Funds.
In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs. These VIEs are primarily investment funds for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights.
The reason that the Company does not consolidate the Unconsolidated Master Fund or real estate funds that are VIEs is due to the Company's conclusion that it is not the primary beneficiary in each instance. Investment fund investors are entitled to all of the economics of these VIEs with the exception of the management fee and incentive income, if any, earned by the Company. The Company has equity interests in the funds as both GP and Limited partner. In these instances the Company has concluded that the variable interests are not potentially significant to the VIE. Although the Company may advance amounts and pay certain expenses on behalf of the investment funds that it considers to be VIEs, it does not provide, nor is it required to provide, any type of substantive financial support to these entities outside of regular investment management services (see Note 6 for additional disclosures on VIEs).
Equity Method InvestmentsFor operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying condensed consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary.
OtherIf the Company does not consolidate an entity or apply the equity method of accounting, the Company accounts for such entities (primarily, all securities of such entity which are bought and held principally for the purpose of selling them in the near term as trading securities) in accordance with US GAAP, at fair value with unrealized gains (losses) resulting from changes in fair value reflected within net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.
Retention of Specialized AccountingThe Consolidated Funds and certain other consolidated companies are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized

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Table of Contents
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

accounting for these investment funds pursuant to US GAAP. The Company reports its investments on the condensed consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within net realized and unrealized gains (losses) on investments and other transactions. Accordingly, the accompanying condensed consolidated financial statements reflect different accounting policies for investments depending on whether or not they are held through a consolidated investment company. In additio