Business Context and Reporting Period
Cohen & Company Inc. filed its Quarterly Report on Form 10-Q for the period ended March 31, 2010. The Company is an investment firm specializing in credit-related fixed income investments, organized into three segments: Capital Markets, Asset Management, and Principal Investing. Effective January 1, 2010, the Company ceased to qualify as a Real Estate Investment Trust (REIT) and is taxed as a C corporation. The financial statements reflect the combined operations following the December 2009 reverse acquisition merger with Alesco Financial Inc. (AFN).
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $41.7 million | $16.9 million |
| Net Income | $4.6 million | ($7.4 million) loss |
| Net Income Attributable to Cohen & Company Inc. | $2.9 million | ($7.4 million) loss |
| Operating Income | $6.3 million | ($6.3 million) loss |
| Cash and Cash Equivalents (Ending) | $29.2 million | $28.5 million |
| Total Debt | $47.0 million | $62.0 million |
| Assets Under Management (AUM) | $15.5 billion | $18.9 billion |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 147% to $41.7 million, driven primarily by a 101% increase in Net Trading revenue ($22.8 million) and a 394% swing in Principal Transactions and Other Income to a gain of $11.5 million.
- Asset Management Decline: Asset management fees decreased 27% to $6.8 million, largely due to reduced fees from collateralized debt obligations (CDOs) caused by asset defaults and liquidations.
- Profitability Turnaround: The Company reported a net income of $4.6 million compared to a net loss of $7.4 million in the prior year, resulting in a $12.0 million improvement.
- Debt Reduction: Total debt decreased by approximately $15 million to $47.0 million, following the repayment of the entire $9.95 million balance on the 2009 Credit Facility and the repurchase of $5.1 million in contingent convertible senior notes.
- Cash Flow: Operating activities used $24.1 million in cash, a significant shift from the $2.7 million provided in the prior year, primarily due to changes in trading assets and liabilities.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the revenue increase to the expansion of the Capital Markets segment (headcount increased from 44 to 96) and improved results from risk capital strategies. The decline in asset management fees is attributed to market conditions affecting CDO performance.
- Outlook: The Company intends to retain earnings to finance business development and does not anticipate paying cash dividends in the foreseeable future. It expects to fund remaining delayed draw notes ($4.1 million) in a subprime auto loan securitization during the remainder of 2010.
- Risks and Contingencies:
- Legal Proceedings: The Company is defending against litigation involving the Sentinel Management Group liquidation trustee regarding the suitability of CDO sales. No contingent liability has been recorded.
- Valuation Risk: A significant portion of the investment portfolio (Level 3 assets) relies on internal valuation models due to limited market liquidity, creating uncertainty regarding final realizable values.
- Tax Status: The Company has recorded a valuation allowance against Net Operating Loss (NOL) and Net Capital Loss (NCL) carryforwards, as it is not yet "more likely than not" that these benefits will be realized.
Investor Verification Checklist
- Verify the sustainability of the 101% increase in Net Trading revenue given the reliance on Level 3 fair value estimates.
- Monitor the status of the Sentinel Management Group litigation and potential impact on future earnings.
- Assess the Company's ability to generate taxable income sufficient to utilize its $48 million NOL and $69 million NCL carryforwards before expiration.
- Review the progress of the Brigadier fund liquidation, which is expected to be completed in 2010.
- Confirm the Company's compliance with net capital requirements for its U.S. and U.K. broker-dealer subsidiaries.