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.
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
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
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
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 | |||||||||||
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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.
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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
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
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
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
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.
12
Cowen Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Index
Notes to Condensed Consolidated Financial Statements | Page | ||
13
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. |
14
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 Entities—VOEs 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.
15
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 Investments—For 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.
Other—If 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 Accounting—The Consolidated Funds and certain oth