Cohen & Company Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company is a financial services firm operating in Capital Markets, Asset Management and Principal Investing, with fixed-income and SPAC-related activities. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $(0.7) | $102.7 |
| Operating income (loss) | $(19.9) | $70.4 |
| Net income (loss) | $(35.2) | $66.7 |
| Net income (loss) attributable to Cohen & Company Inc. | $(7.6) | $9.4 |
| Basic and diluted loss per common share | $(5.46) | Basic earnings $9.04; diluted earnings $6.98 |
| Net cash from (used in) operating activities | $14.4 | $(28.2) |
- Principal transactions and other income swung to a loss of $18.4 million from income of $79.6 million. The filing attributes significant Q1 2022 principal and equity-method losses to falling SPAC and post-business-combination company share prices.
- Net trading revenue was $12.0 million, down 37%; asset management revenue was $1.9 million, down 10%; and new issue and advisory revenue rose to $3.8 million from $1.8 million.
- Operating expenses fell 40% to $19.2 million, chiefly because equity-based compensation declined to $1.1 million from $13.6 million. The prior-year expense included compensation related to the Insurance SPAC II merger.
- At March 31, cash and cash equivalents were $62.5 million, total assets $2,706.7 million, total liabilities $2,585.3 million, and total equity $121.5 million. Cash included $40.5 million of counterparty cash collateral that the company says is temporary and unavailable for general operations.
- Debt carrying value was $28.6 million, down from $43.4 million at year-end. The $15.0 million 2017 convertible note was converted into Operating LLC units, rather than repaid in cash. The remaining debt included $4.5 million of 10% senior notes and $24.1 million of junior subordinated notes, net of discount.
- Operating cash flow was positive, but cash generation included material working-capital and trading/repo movements. Cash increased $11.9 million during the quarter to $62.5 million; investing activities used $0.1 million and financing activities used $2.2 million.
Material changes and business developments
- Matched-book net trading revenue declined to $9.8 million from $11.3 million. The company completed its wind-down of the GCF repo business by year-end 2021; the remaining repo business is gestation repo.
- Company-sponsored CDO assets under management were $1.17 billion at March 31, 2022, versus $1.24 billion at December 31, 2021. Total AUM was $2.27 billion. CDO management fees declined amid lower AUM, CDO auctions, removal as manager of one CDO, and collateral paydowns.
- The company reported $12.1 million of losses from equity-method affiliates, primarily other SPAC sponsor entities. It also recorded $18.7 million of fair-value losses on investments included in principal transactions.
- The company committed up to $15 million to the CREO joint venture; its investment was $6.6 million at quarter-end, with $8.5 million of unfunded commitments reported.
- The board declared a $0.75-per-share special dividend in addition to the regular $0.25 quarterly dividend, or $1.00 per share declared in Q1. A further $0.25 quarterly dividend was declared in May for payment in June. The filing cautions that future dividends are not assured.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said available cash, the trading portfolio and related borrowing capacity should provide sufficient liquidity for near-term operations, while noting uncertainty about replacing or obtaining financing.
- Management describes results as unpredictable and sensitive to financial-market conditions, interest rates, mortgage volumes, trading activity and SPAC-market performance. It reported continued fixed-income margin pressure and said further SPAC equity declines could cause additional losses.
- Liquidity and funding risks include repo and margin calls, counterparty credit exposure, and restrictions on moving capital from regulated broker-dealer JVB. At March 31, JVB reported $56.9 million of net capital against a $0.25 million minimum; the French subsidiary reported $1.1 million against a $0.5 million minimum.
- The company had $2.19 billion of reverse repos and $2.19 billion of repurchase agreements outstanding at March 31, down from approximately $3.18 billion on each side at year-end. These are substantial secured financing balances, not equivalent to unrestricted cash or corporate debt.
- A trademark infringement and unfair competition complaint filed against the company remains pending. The company filed a partial motion to dismiss on April 18, 2022 and said it intends to defend itself; the filing does not quantify potential exposure.
- The company identified an immaterial error in previously reported December 31, 2021 tax-related balances and revised the comparative balances in this filing. It also disclosed that controls over financial reporting were effective at March 31, 2022, with no material quarterly change in internal controls.
- Other stated risks include COVID-19 and geopolitical market disruption, SPAC regulation and litigation, valuation uncertainty in less-liquid investments, competition and reliance on key personnel. The company’s fair-value estimates involve judgment and may differ from realizable sale prices.
Important facts for investors to verify
- Reconcile the $18.4 million principal-investment loss and $12.1 million equity-method loss, including the fair values and restrictions on SPAC-related holdings.
- Assess the quality and availability of the reported $62.5 million cash balance, particularly the $40.5 million counterparty collateral obligation and regulatory limits on subsidiary capital.
- Review debt terms and maturities, including the 10% senior note’s potential early repayment provision, variable-rate junior subordinated notes, and the converted note units’ redemption and potential dilution rights.
- Monitor repo financing balances, collateral coverage, counterparty concentrations and margin requirements; verify that operating cash flow is interpreted in light of collateral and repo movements.
- Track CDO AUM and fees, SPAC-market exposure, the CREO commitment, dividend sustainability and developments in the trademark litigation.