Cohen & Company Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Dollar amounts below are in millions unless stated otherwise. The company provides capital-markets, asset-management and principal-investing services; it reported approximately $2.01 billion of AUM at quarter-end.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $17.1 | $23.5 | $48.5 | $31.9 |
| Operating income (loss) | ($4.1) | $2.8 | ($4.6) | ($25.2) |
| Net income (loss), consolidated | ($5.7) | $0.4 | ($16.5) | ($47.1) |
| Net loss attributable to Cohen & Company Inc. | ($0.4) | ($0.9) | ($9.7) | ($10.4) |
| Basic loss per common share | ($0.28) | ($0.64) | ($6.40) | ($7.33) |
| Net interest expense | $1.7 | $1.3 | $4.9 | $3.8 |
- Q3: Revenue fell 27% year over year as asset-management and new-issue/advisory revenue declined. Operating results swung from income to loss; higher expenses, interest expense and equity-method losses also weighed on results. Principal transactions improved but were partly offset by a $6.8 million write-off of the Stoa USA/FlipOS investment.
- Nine months: Revenue increased 52%, principally because principal transactions and other income improved by $36.6 million from the prior-year period, which included substantial investment losses. Net trading revenue declined 24%, asset-management revenue declined 25%, and new-issue/advisory revenue declined 53%. Operating losses narrowed, but the company remained loss-making.
- No conventional gross-margin measure is presented. Operating expenses were $21.2 million in Q3 and $53.1 million for the nine-month period.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $13.4 million at September 30, down from $29.1 million at December 31, 2022. Nine-month operating cash flow was negative $36.2 million; investing activities provided $28.5 million and financing activities used $8.1 million.
- Total assets were $801.0 million, total liabilities $728.3 million and total equity $72.7 million at quarter-end. Trading investments were $193.5 million; receivables under resale agreements were $418.1 million.
- Debt carrying value was $29.5 million, including $4.5 million of 10% senior notes due January 2024 and junior subordinated notes carried at $25.0 million after discount. The subordinated notes’ aggregate par amount is $49.6 million; the filing estimates their combined yield to maturity at 21.74% using quarter-end rates. A separate $7.9 million redeemable financial instrument is payable to JKD Investor.
- Repo obligations were $417.9 million, broadly matched by $418.1 million of resale-agreement receivables. These short-term secured financing balances are excluded from the filing’s contractual-obligations table.
- Management said available cash, the trading portfolio and related borrowing capacity should meet near-term operating needs, while cautioning that replacement or additional financing may not be available on favorable terms. At quarter-end, broker-dealer regulatory net capital was $52.6 million versus combined minimum requirements of $0.7 million. JVB’s $15 million Byline credit facility was undrawn at quarter-end and matures December 2023.
Material changes and notable items
- Effective April 1, 2023, the company began consolidating the SPAC Fund after other investors redeemed their interests, adding assets and liabilities to the consolidated statements. Redemption amounts due to those investors were paid in full by September 30.
- Share forward arrangements contributed a reported $16.2 million of principal-transaction revenue for the nine months, while the related balance sheet included $25.6 million of associated long positions and an $18.1 million liability. These positions are valued at fair value and may be volatile.
- The company increased its valuation allowance against tax-loss carryforwards, recording $5.2 million of deferred tax expense in the nine-month period. Management cited recent losses and market conditions; it estimated federal NOL and net capital loss carryforwards of $98.0 million and $59.7 million, respectively, at year-end 2023.
- The company recorded $1.8 million of additional FGMC-related losses in the first nine months, including $0.1 million in Q3, as the value of remaining mortgage collateral declined. It does not expect a material recovery on its unsecured bankruptcy claim.
- After quarter-end, SFTGQ declared bankruptcy and was delisted; the company said it expected to write off its $0.3 million investment in October. Also after quarter-end, the company entered an at-the-market equity distribution agreement; the filing states that SEC rules permitted up to $4.7 million of sales under the agreement, and no shares had been sold as of September 30.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management describes results as unpredictable and sensitive to financial-market conditions, transaction volumes, interest rates, mortgage activity and equity valuations.
- Management cited continuing competitive pressure and declining margins and volumes in parts of fixed-income brokerage. Higher rates may reduce fixed-income valuations, mortgage activity, new issuance and transaction volumes; continued SPAC equity declines may cause further investment losses.
- Gestation repo activity is concentrated among a limited number of counterparties: seven reverse-repo counterparties at quarter-end. Repo financing involves collateral, margin-call and counterparty-default risks; failure to meet collateral calls could disrupt operations.
- The company disclosed a continuing covenant violation relating to Alesco Capital Trust I that restricts issuance of debt subordinated to or pari passu with that debt. It said the violation does not materially impair operations or financing capacity. The company was in compliance with the Byline facility’s financial covenants at quarter-end.
- Routine legal proceedings and regulatory inquiries arise in the ordinary course; management does not expect them to materially affect financial condition, operations or cash flows. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether operating cash use and the decline in cash continue, and the availability and terms of financing as the $4.5 million senior note and Byline facility approach maturity.
- How much of the nine-month principal-transaction improvement is repeatable, particularly gains from share forward arrangements and other fair-value positions.
- Further changes in SPAC-related investments, fair values, unfunded commitments and potential losses, including the post-quarter SFTGQ write-off.
- Trends in CDO AUM and fees, new-issue/advisory activity, mortgage volumes and gestation-repo counterparty exposure.
- The effect of the larger tax valuation allowance on future reported tax expense and the realizability of deferred tax assets.